Yale School of Management

Program on Social Enterprise

Harnessing business skills and markets to achieve social objectives.

Trouble in Paradigm: How and Why Philanthropy Models Dysfunction in the Economy, and What To Do About It

In 2019, corporations and foundations gave nearly 100 billion dollars to support a wide array of causes. In the turmoil of 2020, we saw major gifts including, Jeff Bezos’ $10 billion pledge to fight climate change and Walmart’s $100 million gift towards racial justice. For Clara Miller, who spoke at the Social Impact Lab on November 4, 2020, there’s a big difference between “giving” and “sharing.” From her perspective, “sharing” makes all the difference.

Miller, who has been named seven times to the Nonprofit Times “Power and Influence Top 50” and who founded and led the Nonprofit Finance Fund, has been a leader in “sharing” the wealth. As President of the F. B. Heron Foundation, she helped the institution transition the entire $300 million endowment to mission-related investments, increasing the allocation of mission-aligned capital from 40 percent to 100 percent. Since then, she has called on other institutional philanthropies to follow suit. 

According to Miller’s analysis, much of the current philanthropic system is based on a flawed business model. Endowments of billions of dollars are invested through a lens that exclusively considers financial returns, a portion of which will be allocated to grants. While philanthropy shines a light on the grants it makes to admirable causes, it often fails to acknowledge the impact of its significantly larger portfolio of investments, which may be invested in companies whose activities may run counter to its philanthropic goals (such as reducing carbon emissions). Philanthropies risk profiting from or supporting firms and industries in direct competition with their mission. In this way, philanthropy is part of the problem and not the solution. Their gifts are reactive, “too little too late” solutions to problems that their own investments may be helping to enable. This is fueled by a false dichotomy that if an investment is “socially good” that it must be “financially bad.” Instead, we should consider the fact that everything has impact, some of it positive and some negative.

So, how do we reprioritize this system to properly elevate social impact? For Miller, it starts with modifying the business model to account for the actual performance and impact of the entire portfolio of funds instead of evaluating impact based on grantmaking alone. To enable this, there needs to be an independent organization that creates a system of standardized data to provide greater transparency and accountability in the field on cumulative social impact.

Similarly, we need to recognize business as a force for good­—when we exclude business as part of the solution, we create a self-defeating model. Instead, Miller advocates for reforming the economy to establish a culture of transparency and a new ethic of “materiality.” As a society, we are too short-sighted around longer-term material impacts of issues such as climate change and racial justice. These plaguing issues have tremendous costs to business and society. Further, these costs will persist if not directly grappled with.  Recent collaborative efforts from the International Business Council to create frameworks and standards for reporting on such issues, to be evaluated alongside GAAP financial reports, can help enable a shift in that direction. 

To do all of this, we need engagement from a broad and diverse group of stakeholders including businesses, governments, employees, and customers to help identify better aligned long-term incentives. Philanthropy needs to be built into our society, not just operating at the margins.

By Nicole Julian MBA 2022