Economics of Philanthropy: Warren Buffett way

Philanthropy is a big economic activity. The cumulative total amount of philanthropy during the last 10 years is $400 billion, last 20 years is $1.5 trillion, and last 50 years is $4 trillion. Interestingly, Warren Buffett is popular for his big-time philanthropy than for being among the world’s wealthiest.

Business leaders crave to engage in philanthropy. In most of the cases, it is only after they achieve their wealth targets. Rare are the instances where philanthropy has been simultaneous alongside the growth until their wealth desire is satiated. May be there are many who are discreet in their philanthropy. There could be many who never embraced any philanthropy regardless of their wealth. There are allegations on surrogate advertising and brand promotions through philanthropy activities. For several reasons, besides the undertaken activities, attention is also paid to the derived publicity and the modes of philanthropy.

Although there are many modes for disbursing philanthropic funds, the most preferred modes are Endowment Funds, Donor Advised Funds, and Designated Funds. In India, the popular modes are Endowment Funds and Contributing Funds. Endowments have permanent funds and spend only the income for the charitable purposes. This model gives financial sustainability for the causes. Contributing Funds are non-endowment with simultaneous spend for the causes but may lack continuity and certainty. The diseases such as HIV/AIDS, polio, malaria, eye vision, etc., are combatted and largely been successful mostly with the private philanthropic funds.

The world has seen millions of philanthropists, small to big with noble thoughts and commitment towards social contributions. Keeping aside the volumes, the countries with higher level of philanthropy are Indonesia, Ukraine, Kenya, United States, Myanmar, Kuwait, and Canada. The countries with very negligible philanthropy are China, Mexico, Spain, Norway, and Switzerland.

Globally, there are millions of philanthropists who had and have been involved in philanthropy directly or indirectly. It may be a surprise to know that despite having a lot of wealth and huge business volumes, philanthropists face several challenges to commit funds and undertake activities. The top philanthropists include Novo Nordisk Foundation of Denmark, Andrew Carnegie of USA, John D. Rockefeller of USA, Welcome Trust of London, Warren Buffett of USA, Bill Gates of USA, George Soros of USA, Tata of India, Azim Premji of India, etc.

Of all, the case of Warren Buffett is different. Although Buffett started philanthropy at the age of 36 years in a small way, his major philanthropy started when he was 77 years old at which time his wealth was about $44 billion being 2nd richest second only to Bill Gates with wealth of $86 billion.

In year 2004, number of shares in Berkshire Hathaway held by Warren Buffett and his wife are 508,998. This equates a wealth of about $374 billion at its peak if Buffett were holding all of their shares without donating. This is about 12% higher than $334 billion the current wealth of Elon Musk presently ranked as world’s wealthiest.

In year 2006 Buffett made a pledge of 85% of his wealth for philanthropy purpose and later he increased it to 99%. The pledged amount was to be distributed at the rate of 5% every year and the total amount is through non-endowment funds meant for spending during the relevant periods for the purposes. ?Initially Buffett committed 83% of his total philanthropic amount through Bill Gates but in due course announced the contribution to Bill Gates will continue only during his lifetime.

While initially Buffett preferred to channel his donations through non-family trusts, in due course he claimed that he gained confidence on his 3 children and gradually changed his mind to let his children handle the distribution. At the rate of 5%, the distribution of the committed amount will take another 75 years going into 6th generation after him.

Right from the time when Buffett announced his first philanthropy in year 2006, almost every subsequent time his announcements and distributions related to philanthropy are made, the share prices of Berkshire Hathaway received support on the bourses.

Many donors have accomplished self-actualization needs with philanthropy. There are proofs that society does reciprocate to the business groups with support including goodwill and investors trust.

Buffett, besides undertaking his own philanthropy with non-endowment fund mode, has also influenced many super wealthy to take the challenge of committing funds to philanthropy in terms of percentage of their total wealth. There are instances where acquisition by Berkshire of its targets was smooth due to the brand image Berkshire has garnered with the philanthropy of Warren Buffett. Thus, philanthropy has a great economic sense as well. In any case, Buffett’s way of philanthropy has been unique, and it is expected that his heirs continue the philanthropy with the same spirit and reach.

Disclaimer: Dr. Kishore Nuthalapati is an Economist, and is the CFO of BEKEM Infra Projects Pvt Ltd, Hyderabad, India. Views are his personal and do not reflect those of any of the organizations he is or was associated with.