07/06/2010 05:12 am ET Updated May 25, 2011

Investing Money for Social Good: the Case of Warren Buffett and Bill Gates

The new post-recession shoots are just starting to appear out of the recession's frozen dirt and people are very interested in how best to encourage that fragile new growth. Nowhere was that more evident than at this weekend's Berkshire Hathaway's Annual General Meeting (AGM).

The attendees were at what gets called "Woodstock for Capitalists" to see Warren Buffett, because he is as much a folk hero as he is the world's best investor willing to share his thoughts. And because attending Berkshire Hathaway's AGM is as much "a very subtle way of saying I'm very smart and I'm very rich," as a way to learn from the highest profile capitalist think-tank.

But investment think-tank it is. So it's somewhat surprising that although many there made mention of how Buffett, the world's third wealthiest individual, promised 85 per cent of his total fortune ($37 billion total lifetime pledge) to the Gates Foundation in 2006, few people want to discuss it. In fact, few know how that investment is doing, ask questions about it at the AGM or elsewhere, or have opinions about how that money could best generate financial and social rewards. Possibly because, like many who give to charity, Buffett himself seems unconcerned.

But if he were to concern himself with just how charity should best "invest" in public good and get a return, rather than just using his donation to eliminate his estate taxes, he would benefit. And the world would benefit from his efforts to maximize financial and social returns on investment.

Like many, he might think it's too complex a problem. While it's relatively simple math to calculate the financial return of using tax deductions from charitable donations, the return almost impossible to quantify is the social return: that is, how much good the money will do, whether that's feeding, educating, or curing people. But investment is never simple; it's always a puzzle and it's one he's used to.

But instead of applying himself to it, Warren Buffett has effectively absolved himself of the question of how to maximize the social return by giving his money to the world's richest man to disburse.

It's not his usual approach. Buffett has built Berkshire Hathaway into the world's most successful investment vehicle by refusing to distribute dividends and, carefully and wisely, investing all of its cash flow into businesses that it will hold rather than sell. Now, he has done the exact opposite with his charitable investment. Donating to the Bill and Melinda Gates Foundation is not an imprudent decision; however, the charitable world is gaining only Warren Buffett's wealth and not his wisdom.

Listening to Warren Buffett answer questions about his estate and charity at the AGM left me disappointed that he has taken such a traditional and hands-off approach to charity. With Bill Gates sitting in the front row with the other directors, I wanted to propose a challenge to both of them. What if Warren Buffett were to invest $50 million dollars, for-profit, to find a cure for malaria. And Bill Gates were to donate $50 million through his charity to the same end. In five years, we could measure which route achieved, or came closer to, a cure and which was most effective in distributing its scientific achievements to those in need. Properly structured, tax deductions for pursuing scientific research are as good or better as charitable donation deductions.

If successful, the corporation is better positioned to take the science to production and market. If it goes to market, then the corporation, unlike the charity, will replenish its coffers and have a more sustainable model for accomplishing enduring public good.

This approach, sometimes called investment philanthropy, is not a new idea. Gatorade, for example, was a University of Florida invention with beginnings in 1965. Back then, water was thought to give people cramps, so researchers at the university set out to find an alternative. The university paid for the research, then sold the results. Between 1973 and 2003, Gatorade's royalties have meant $80 million in revenues for the university. That for-profit venture has arguably done more social and educational good, than if that same original "donation" led to research that was simply made public for free.

But the idea of investment philanthropy surprised most of the attendees I spoke to this weekend. A few said charity and profit should never mix.

And it certainly doesn't work in all cases. In some cases, investment philanthropy is the best option. Let's say you're trying to find the cure for a disease where there are many sufferers, including many in the developing world. If a cure were found, that cure would be highly marketable. So you could generate income and create a legal entity whereby all proceeds of that cure went back into research to maximize social good as well.

But if you're trying to find a cure for a disease where there are only 50,000 sufferers worldwide, which means there's no real market for the drug, then charity would be the best social vehicle, with the tax savings as the financial benefit.

In fact, there is no simple answer to the question about whether investment philanthropy is better than distributive charity. However, the answer might become clearer if the world's most successful capitalist set up a Social Investment Berkshire Hathaway, which invested its cash flow in projects that meet a social benefit criteria in addition to profit. Even diverting Berkshire's approximately $20 billion annual tax bill to public benefit investments would be an important first step that would help the common good as well as provide social satisfaction to the investors.

Maybe the world's most successful capitalist would simultaneously become the world's most successful philanthropist -- without giving away a dime.

John D. Rockefeller famously said it's easier to make money than it is to give it away wisely. It's true. With a declining government role in providing social services, and serious social, educational and health problems facing us, we need great minds working on how to maximize the social and financial benefits of the money we give away.