What Happens When Charities Become Major Shareholders?

It's already been a good month for charitable giving. Warren Buffett gave a $1.6 billion annual gift in Berkshire Hathaway stock to the Gates Foundation, the charitable endeavor begun by Microsoft founder Bill Gates. It's a lucky foundation indeed, as the two of the richest people in the world generously provide their excessive fortunes to it. But the type of gift that Buffett provided raises an interesting question: what's a charity to do when acting as a shareholder?

First, the size of this gift is simply incredible. It alone would instantly make the Gates Foundation one of the best-funded foundations in the world, if it weren't already. But for Warren Buffett, $1.3 billion really isn't that much. It's just 3.4% of his estimated $47 billion fortune, according to Forbes Magazine's March calculation. That's comparable to a person with a net worth of $100,000 giving $3,400 to a charity. In fact, in terms of how much the giver's life might be affected by the sum, it seems like even less: it's pretty unlikely that any person could reasonably spend more than a few billion in their lifetime, much the less $47 billion. This isn't meant to paint Buffett as anything less than incredibly generous, as he has long promised to give almost his entire fortune to charity when he passes. It's just good to provide a little perspective.

But what's a foundation to do with a stock gift of this magnitude? The mission of a charity is to provide money to worthy endeavors. So is it best to hold onto an investment, or sell it, so the charity has more cash to distribute? It probably depends.

Large foundations generally have significant investment portfolios. Often, they're most interested in bonds and high-dividend stocks, so that they can use the income they generate for their contributions to the poor. Of course, the opportunity cost of holding onto all that wealth is having less of your assets to distribute to the needy more immediately. But there's certainly something to be said for the stability perpetual income provides.

As the stock in those investment portfolios grow, however, so do rights as a shareholder. And how is a non-profit to act in that role? On one hand, the higher the profit of the corporations of which it owns shares, the better off the causes the charity benefits. Yet, a non-profit's ethics might urge it to vote for the corporation to act more benevolent, and less focused on high earnings. It may prefer executives who give better wages to workers, for example. But that would provide less to it as a shareholder.

This is a difficult internal conflict that is likely becoming increasingly common, as the non-profit industry grows and the rich more commonly provide stock gifts to charities. Indeed, Buffett alone has promised to eventually give 85% of his Berkshire Hathaway holdings to charities. The easiest solution to avoid the conflict might be to sell all stock and rely on fixed income only, but that isn't necessarily in the firm's best interest either, as stocks often outperform debt. So they will inevitably remain shareholders. In that role, how should non-profits behave?