The following thoughts come from a senior foundation official who asked to remain anonymous because the foundation at which this person works does not have a policy on blogging. Thanks for these ideas - you know who you are.
A twist here that seems mostly ignored… . The folks who argue for an investment policy that focuses on maximum financial return, with a blind eye toward any social interest, are missing two things.
I think this idea of a social well-being index for investments is really intriguing. Others?
One, they are missing the costs associated with the impacts of the investment behaviors. Investments that exacerbate social ills – whether hunger, sickness or environmental damage – all carry hard-dollar costs that can be estimated. The chief investment officers do not have to bear these costs, true. But someone does. So the foundation boards and investment officers are free-riding on others’ burdens. More than that, they may actually be creating additional burden – not just ignoring status quo – that creates hard-dollar costs for others.
Which brings me to the second thing they miss: That foundations are not investing dollars for benefit of a client in the way hedge fund managers are. They are investing for a return for the public trust, which has agreed to shelter this wealth from tax exposure on the condition that the wealth be used to improve the human condition. While hedge fund managers may be able to free-ride on others’ burdens because they can truthfully say they are working for their client, foundations that create costs through their investment policies are creating costs for the public trust.
I think the current situation can be explained by investment officers wanting to make large salaries by tying their compensation to growth of foundation endowments. That’s a reasonable and rational behavior, given the way private equity managers are compensated. But the logic falls when you consider that the public has agreed to shelter large chunks of wealth from taxes – specifically to benefit the public – and yet this very wealth may be invested in ways that cause social harm. Tying investment officer compensation to an index of social well-being would be interesting.