Posted Monday, June 26, 2006
Warren Buffett. Click image to expand.Warren BuffettThe nation’s second-richest man, Warren Buffett, has decided to turn over most of his $44 billion fortune to the nation’s richest man, Bill Gates. Buffett is committing to give about 10 million Class B shares in his holding company, Berkshire Hathaway, to the $30 billion Bill and Melinda Gates Foundation. (Here’s the Gateses’ gracious response.) He’ll start by handing over 500,000 shares this year (worth about $1.5 billion at today’s price), and will make annual donations of smaller numbers of shares. Buffett will also give billions to foundations run by his children, and to the foundation created by his late wife, Susan Thompson Buffett.
It has taken the 75-year-old Buffett a long time to decide to give away his fortuneÃ³he’s been too busy making it bigger. (The critics who have spent years nagging Buffett for his previously modest philanthropy will have to find someone else to pester.) Now that he has decided to disburse his billions, it’s fascinating to see that he is giving away his money the same way he made it: looking for value, pinching pennies, letting managers execute successful strategies, and relying on his own investing brilliance. Call it value philanthropy.
Buffett consistently ranks second on the Forbes 400, and yet he is famously frugal. As a value investor, Buffett has made a career of purchasing a dollar of assets for 50 cents. While it’s difficult to purchase a dollar of philanthropy for 50 cents, Buffett is doing his best to economize. Creating and operating a foundation to house, manage, and give away significant sums can be an expensive proposition. You have to rent office space and hire executives, accountants, program officers, and support staff. In its most recent annual survey, the Chronicle of Philanthropy found, for example, that the Rockefeller Foundation last year made $110.5 million in grants and spent $30.5 millionÃ³27 percent of that totalÃ³on administrative costs. The Gates Foundation is far more efficient, although it doesn’t appear in the Chronicle’s survey. Last year it gave out more than $1.3 billion in grants and reported management expenses of $42 million. The foundation also reports that it has made more than $60 million in investments in property and equipment. Bill and Melinda Gates are funding the construction of a new headquarters for the foundation. It costs money to give away money. Buffett hates to spend money unnecessarily. By transferring funds to the Gates Foundation, as Buffett told Fortune’s Carol Loomis, he’s avoiding the annoyance and expense of building a philanthropic infrastructure.
When he buys a firm, Buffett frequently keeps the management on and lets them keep running the business. So far this year, Berkshire has acquired Israeli metalworking company Iscar, apparel maker Russell Corporation, and communications firm Business Wire. In each instance, Buffett retained existing management. “They do a much better job than I could in running their operations,” he told Loomis. Just so, Buffett doesn’t presume to know how best to fund AIDS-prevention programs. In effect, he’s buying a share of a successful philanthropic business (the Gates Foundation) and retaining existing management (Bill and Melinda Gates).
But while he’s willing and eager to outsource management, Buffett has proven utterly unwilling to outsource money management. Buffett is sharing his wealth but controlling it. The outside investors who manage the Gates Foundation’s $30 billion endowment are very conservative. Gates has asked the managers to target a 5 percent return each yearÃ³so that it can have enough to money to pay out 5 percent of its assets each year, as mandated by the government, without dipping into the principal. The foundation’s 2005 financial statement shows that about two-thirds of the assets are in bonds.
Buffett has effectively cut these managers out by keeping the donation in his hands for as long as possible. Buffett has little patience or use for professional money managers. Unlike Gates, he hasn’t diversified his personal holdings by selling stock in the company he created and parceling it out to outside managers. In this year’s letter to shareholders, Buffett railed against the group of parasitic professionals he dubbed “Helpers”Ã³brokers, consultants, hedge-fund and private equity managers who help themselves to fees and shares of the profit. And Buffett has structured his donations to keep his money out of the hands of any HelpersÃ³and to buy more philanthropy per donated buck. Instead of giving a lump sum to be managed as part of an endowment, Buffett has committed to give the Gates Foundation a chunk of Berkshire Hathaway stock each year. Based on his track record over 40 years, he believes he can do a heck of a lot better than 5 percent per year and thus generate more cash for philanthropy. As the value of his stock rises, so too will the value of his donation. Another wrinkle: Buffett has told the Gates Foundation that it has to spend the cash he donates in the same year. That way, chronically underperforming Helpers will never have their chance to get their hands on his cash.
For more than four decades, Buffett has believed that he could best serve his shareholders by managing his own money effectively, seeking value, and minding expenses. Now, he believes he can best serve the world by doing the same.
Daniel Gross – Slate