Rates of Return 

How best to accomplish a foundation’s mission? Passive investment vs. shareholder activism

By Michael Connor

Bill and Melinda Gates may not be that unusual after all—at least when it comes to the investment policies of their eponymous foundation. The Gates Foundation is the largest in the world, with an endowment larger than the gross domestic products of 70 percent of the world’s nations.

Amidst general praise for its work on social issues, the foundation found itself in the spotlight in January following the publication of a two-part Los Angeles Times investigation, which claimed that hundreds of Gates Foundation investments have been in companies that “contribute to the problems of health, housing and social welfare that the foundation tries to solve.”

Among examples cited by the Times: a polio and measles vaccination program in Nigeria that takes place amidst pollution filled with “toxic byproducts” from nearby petroleum plants—owned by oil companies in which the Gates Foundation has invested $423 million. In the United States, the Times said, the foundation has invested heavily in finance companies with predatory lending practices.

Following publication of the series, Gates Foundation CEO Patty Stonesifer fired back: “The stories you told of people who are suffering touched us all. But it is naive to suggest that an individual stockholder can stop that suffering. Changes in our investment practices would have little or no impact on these issues.”

That, of course, set off a firestorm within the socially responsible investment (SRI) community. “Specious and cowardly,” raged one blogger. “Odious,” sniffed another.

And yet, it seems, not uncommon. “While the program people in many of these foundations are very progressive and very willing to get involved, there tends to be a wall between them and the financial side of the foundations, which is often dominated by old relationships with mainstream firms who tend to look askance at SRI [socially responsible investing] and anything to do with shareholder advocacy, so you really come up against a cultural wall,” says Conrad MacKerron, Director of the Corporate Social Responsibility Prog­ram at As You Sow, a San Francisco-based activist foundation.

SRI advocates acknowledge that “screening” stocks based on social or environmental criteria—which could prevent a foundation from investing in many companies—might prove difficult for large foundations seeking to maximize growth of their portfolios. But they argue that foundations have a responsibility to vote proxies and bring shareholder resolutions in line with their social mission. And that’s apparently not happening: A survey last year by The Chronicle of Philanthropy found that of the nation's 50 wealthiest private foundations, at least 30 ask their money managers to make all decisions about proxy voting.

The New York-based Nathan Cum­mings Foundation, with an endowment of more than $500 million and a focus on economic and social justice issues, screens its investments only for tobacco, but it routinely votes proxies and brings resolutions on social and environmental issues.

“In a number of these cases, the agreement as a result of the resolution has changed company behavior,” says President and CEO Lance Lindblom. Last year, the foundation co-sponsored shareholder resolutions involving Lowe’s and Home Depot. They were withdrawn before a vote, when the two retailers agreed to new commitments on energy efficiency.

As for the Gates Foundation, “I would think they have an obligation to pay attention and vote on these kinds of issues,” Lindblom says. “If you own $450 million-plus of a particular company, your voice is going to be heard. Management will take your phone call.”

SRI advocates believe more and larger foundations are coming around to their point of view. “You need more large foundations talking to each other on a peer-to-peer basis,” says As You Sow’s Conrad Mac­Kerron. “If Gates goes out and says ‘Yes, we should be voting proxies, we should be engaging companies, using our investments as leverage’, that sends out a very powerful message to the foundation community, which has been ignoring this.”