How could smart people be so dumb? That's the big question raised by the Bernie Madoff-with-the-money affair. But because the decision to entrust one's entire fortune to a black-box operation like Madoff's is a triumph of greed over common sense, it's hard to get worked up about the suffering of the Palm Beach society types who invested their millions with Madoff.
Far more troubling are the losses suffered by foundations and nonprofits -- because they raise important questions about how these institutions invest their money. Among those that have been forced to shut down are The Picower Foundation and the JEHT Foundation (the name stands for justice, equality, human dignity and tolerance) and the Fair Food Foundation. Others that have suffered substantial losses include The Elie Wiesel Foundation for Humanity, the Ramaz School, Yeshiva University, Stephen Spielberg's Wunderkinder Foundation, Hadassah and the Carl and Ruth Shapiro Family Foundation, according to this roundup in the Washington Post.
There is lots to say about all this. See, for example, this excellent story in the New York Times about the campus debates at Yeshiva University, about the scandal and Jewish values. But the screamingly obvious lesson, to me, is that nonprofits and foundations have been woefully deficient when it comes to aligning their investments with their broader purpose. This problem extends well beyond Madoff.
Think, for instance, of that JEHT Foundation, which supported such human rights groups as Amnesty International, Human Rights Watch and Human Rights First. You'd think a group like that would want to invest its money in a purposeful way, avoiding companies that support the genocidal regime in Sudan or cave in to China's demands for Internet censorship. But there's a disconnect between the way groups like JEHT invest their money (i.e., with Madoff) and how they give it away.
The same goes for Jeanne and Kenneth Levy-Church, who were behind the Fair Food Foundation, a group that had generated lots of buzz in the sustainable food world. You would think the couple would want to make sure that their money was invested in companies that respect the environment. Instead, they turned it over to Madoff, and like everyone else, had no idea how he made his money.
This isn't a new issue. You may recall that a few years ago the Los Angeles Times looked into the investments of The Gates Foundation and found that some of the companies it invested in undermined the purposes of the foundation. For example:
"The Gates Foundation has poured $218 million into polio and measles immunization and research worldwide, including in the Niger Delta. At the same time that the foundation is funding inoculations to protect health, the Times found, it has invested $423 million in Eni, Royal Dutch Shell, Exxon Mobil Corp., Chevron Corp. and Total of France -- the companies responsible for most of the flares blanketing the delta with pollution, beyond anything permitted in the United States or Europe."
More generally:
"The Times found that the Gates Foundation has holdings in many companies that have failed tests of social responsibility because of environmental lapses, employment discrimination, disregard for worker rights, or unethical practices."
You can read the long L.A. Times series here.
Steve Viederman, the former president of the Jessie Smith Noyes Foundation, has for years been calling upon foundations to align their investments with their mission. Foundations, he has noted, tend to be passive investors. They rarely throw their weight around when it comes to shareholder resolutions aimed at getting companies to be more socially and environmentally responsible. Here's an essay by Steve about the issue.
Another who has sounded this alarm for years is the shareholder activist Robert A.G. Monks. Monks has griped that university endowments manage investments in ways that are entirely unrelated to their values and missions. See, for example, "To Harvard With Love," a letter that Bob wrote to Larry Summer, who was then the president of his beloved alma mater, back in 2003. He wrote:
"Harvard has become an 'owner' of virtually all of those enterprises whose collective functioning impacts life on earth perhaps more than any other institutions. The question is the extent of Harvard's responsibility as owner. What is Harvard doing now? Does she ensure optimum value? What should she do in the future?"
The fact that people like Steve Viederman and Bob Monks and a group called the Sustainable Endowment Institute have been making this argument for so long and getting so little traction is, among other things, a reflection of the weakness of the socially responsible investment industry. SRI investment pros have simply failed to make the case that values-driven investing is the best way to invest.
If there is any benefit from the Madoff scandal, it will be that nonprofits and foundations pay a lot more attention to how and where their money is invested. They can't just be responsible donors. They need to be responsible owners as well.