Rockefeller 2.0: Gates relaunches philanthropy

Is giving scalable?
Can it scale well? It’s a fair question. The foundation, which began in 1997 in a small office above a pizza parlor near Microsoft, now has some $37 billion in assets and is nearly four times the size of the next largest foundation. Buffett’s pledge also effectively doubles the Gates foundation’s annual spending requirement — the government requires all private foundations to spend at least 5 percent of their endowments annually — and this, for Gates foundation employees, has unleashed a mad scramble to spend more, faster, and all while retaining effectiveness standards amid a staff expansion that will take the foundation from 543 current employees to more than 800 by year’s end. According to Gates Foundation spokeswoman Heidi Sinclair, the foundation distributed some $2.007 billion last year, roughly 5.4 percent of its endowment, and, to keep pace with its growth from the Buffett gift, will be required to give some $3.5 billion away next year, almost twice the 2007 amount. “One of our greatest challenges is making effective grants,” Sinclair says.

“One of the key questions now becomes, do they decentralize?” says Glen Macdonald, director of the Wealth and Giving Forum, an organization of wealthy philanthropists who run their own foundations and regularly give more than $15 million per year to their causes of choice. “Gates as an entrepreneur and innovator has dealt with scale before. The thing to watch now is how he manages that rapid growth and tension that comes with it. One option is to focus on many areas (of giving versus the three existing ones); another is to build collaboration ties with established public and private foundations, NGOs, social enterprises, and corporations.” Macdonald may as well be speaking for many in the sector, as well as Gates, when he says, “What matters most at the end of the day is outcome.”

Three offices
For months now, Gates has been setting up his three new offices from which to tackle his new job: one will be located at Microsoft in Redmond; a second one, about 15 miles away, will be at the Gates Foundation in downtown Seattle, and a third will be sandwiched between the other two, and located much closer to home. Gates spokeswoman Sinclair says Gates has carved out precise blocks of time in each location: a day in Redmond, two at the foundation and two at his personal office, which Gates told Fortune will probably be his “real center of gravity.”

While he’ll remain chairman of Microsoft, his workload at Microsoft will plummet while at the same time, his work at the foundation will increase sharply. Gates’ official title, which he shares with his wife and father, is co-chair, but his day-to-day role will be as the foundation’s chief strategist.

Foundation insiders expect that Bill and Raikes — the Microsoft business software systems division whiz who will take over as CEO of the foundation in September — will join forces to ease the size challenge. Both Gates and Raikes declined to be interviewed by Contribute for this story, but philanthropy and business leaders expect the two to strategize over new ways to use software and leading-edge applications of information technology to both manage the Gates foundation’s growing complexity, if not the rapid growth of the sector itself, as philanthropy enters a new era of globalization.

“For those who have been criticizing the Gates Foundation on its need to grow faster and operate more effectively, one could say they made the best possible choice” when they chose Raikes to replace Patty Stonesifer as CEO, says Diana Aviv of the Independent Sector, a Washington, D.C. coalition of some 600 charities, foundations and corporate giving initiatives. “Raikes is someone who isn’t intimidated by Gates’ immense wealth and who has, in his own right, been extremely successful” in amassing his own fortune — as well as working with Bill at Microsoft on key strategy, marketing and systems engineering initiatives. Indeed, Raikes is widely credited for racking up much of Microsoft’s profits in recent years as head of its business software division, the company’s cash cow.

“One thing to understand about the foundation,” Melinda Gates told BusinessWeek in 2006, “is that it’s a lot like Microsoft in the sense that we do expect results. We are going to measure things as we go along. We are going to make changes. Sometimes you get other people who come in and do small pieces of this and then their money’s spent and they go away. They don’t stop to say: What did we learn here and how do we change or how do we replicate that in a new way somewhere else?’” Foundation insiders and philanthropy sector leaders say they expect this kind of performance measurement standard to include how well the foundation itself tackles its own internal challenges.

Laudable? No question. But critics say it’s not enough.

They say that in order for the Gates Foundation to earn its mantle of global leadership and contribute real value to the sector, it will need to make some critical leadership and governance reforms — and just as rapidly as it’s giving money away and expanding its ability to do so.

Size matters
The loudest voices pushing change as Gates steps into his new job are those of sector leaders who complain that the Gates Foundation, despite is enormity, has only three trustees — Bill, Melinda and Warren Buffett — and that those three alone should not be charged with deciding how all of the billions get spent. “That is much too small and narrow a board to run a foundation whose combined assets will one day exceed the budgets of all but 30 percent of the countries in the world,” says Pablo Eisenberg, a senior fellow at the Georgetown University Public Policy Institute. “This offers little protection to America’s taxpayers or the national interest.”

Last fall, the foundation, responding to the criticisms, announced the creation of three advisory councils, one for each of its three program areas of focus — global health, global poverty and U.S. education. According to Sinclair, the Gates Foundation spokeswoman, the expert panels will help Bill, Melinda, and Warren screen and direct funds for maximum effectiveness. But is it enough? Aviv, the Independent Sector CEO, thinks not. The advisory councils will help, she says, but “boards are wiser when they have a large number of people —because they provide people coming from different backgrounds and experiences” that provide the necessary “checks and balances” required for good decision-making and oversight.

Eisenberg says he doesn’t like the precedent it sets.  “There are going to be other billionaires in the future who are going to establish $40 billion, $50 billion, $75 billion foundations,” he says. “The danger to our democracy is that we’re going to have an increasing number of these mega-foundations run by two or three family members who will dictate how these assets are spent. … Their decisions are going to be made without any political process, public discussion, and that is not good for democracy.”

Str / AFP/Getty Images Bill Gates, top, and his wife, Melinda, bottom right, visit the Meera Bagh slum colony in New Delhi in a December 2005 tour of South Asia.

A second size challenge is that the Gates Foundation, by its presence alone, threatens to monopolize activities in the sector and steamroll other players — the so-called Wal-Mart effect applied to the charity sector. In February, for example, The New York Times published excerpts of an internal document from the World Health Organization, a letter from the agency’s chief malaria expert to the agency’s director, Margaret Chan, alleging that the Gates Foundation was having an adverse impact on research into killer diseases. The letter, the Economist magazine reported in an article the following week, said the super-sized clout of the Gates Foundation was “distorting research priorities and quashing independent thinking by sweeping up the best scientists and keeping them ‘locked up in a cartel.’” However unintended, the Gates Foundation’s giant footprint “is squashing the peer-review process because researchers are now bunched into groups competing for Gates funding, and each member of such a group has ‘a vested interest to safeguard the work of the other,’ the magazine reported, quoting from the memo. “Gates can solve problems with money,” the memo said, “but a lot of money leads to a monopoly and discourages smaller rivals and intellectual competition.”

The Gates’ didn’t answer the charges, but foundation spokesmen say they’re mostly off-base. The foundation often collaborates with other charities, including Bono’s group, the Global Fund to Fight AIDS, Tuberculosis and Malaria. The WHO’s criticisms, some say, belie a fear that that the Gates Foundation is setting itself up to topple WHO’s authority in the public health field: the Gates’ recent grant of over $100 million to the University of Washington to evaluate health treatments and monitor national health systems is a job, some at WHO believe, better left to WHO and the United Nations.

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