Bill Gates has come over all chatty. On Monday he released his second annual letter about his philanthropy, on the back of his recent debut on twitter (where he is ‘following’ Matthew) and new thinking-aloud blog the Gates Notes.

We argue in the book that philanthrocapitalists need to be transparent about their work if they are to be legitimate. Gates has come in for a lot more challenge and criticism in the last year – some in the global health sphere still think he is too focused on technology and his work on education reform in America is drawing fire from teaching unions – so this is a welcome response.

The messages of the letter were clear. Gates celebrates the potential of philanthropy to drive innovation by backing high-risk initiatives that might take 15 years to come to fruition, from an anti-malaria vaccine to a new framework for assessing teachers’ performance. He also dedicates a long section of the letter to “Rich Countries’ Aid Generosity”. Despite being the world’s biggest private donor, Gates’ philosophy is very much that he will only succeed if his giving can lever the much larger sums available to governments. In his letter he throws his weight behind President Obama’s plan to double America’s aid, while blasting Italy as “uniquely stingy” and expressing “huge disappointment” that Italian Prime Minister Sergio Berlusconi turned down his personal appeal for more aid spending.

The big gap in the letter, as Matthew explains in an article for The Economist, is the lack of discussion (except on aid) of the political obstacles confronting his work. For next year’s letter, perhaps?

Some time in the next few months, and by May at the latest, the British public will go to the polls to choose a new government. Whichever of the political leaders gets to see the Queen and take/retake up residence in 10 Downing Street, the Prime Minister will have plenty of tough decisions to make. At home, the economy needs reviving and social problems need tackling. Internationally, Britain has an important leadership role to play on security, development and tackling climate change. A new government will have to face these challenges with diminished resources, since drastic public expenditure cuts are inevitable.

The party policy wonks are working on their proposals at the moment, which will be presented to the nation as their parties’ manifestos. Yet none of the parties has really embraced philanthrocapitalism as part of the solution to the nation’s and the world’s problems. That’s why we have produced our own manifesto setting out our blueprint for philanthrocapitalism to change public services and British society for the better. We are not running for elected office. This is not a partisan document. Indeed, philanthrocapitalism is not a partisan issue. It is an opportunity that Britain’s leaders should be seizing. That’s why we are asking you, our readers to go to our Facebook site and ‘like’ this post to show your support. And if you don’t like what we say, leave us a comment. These are important issues that Britain needs to debate – help us to put philanthrocapitalism on the politicians’ agenda.

THE PHILANTHROCAPITALIST MANIFESTO 

By May of this year one of our political leaders is going to have to do radical surgery on our public services. The last decade has been a gilded era for the government sector as a raft of public spending commitments from health and education to international development have been hailed as the solution to social problems. But those times are over.

Even awash with money, government has struggled to address deep-rooted challenges like child poverty and violent crime. In today’s post-crisis fiscal wasteland spending more is simply not an option. Yet nor is abandoning the young, the poor, the elderly and the vulnerable. Britain needs to find new, more effective ways to tackle the social challenges of the 21^st century.

Britain has a rich charitable and philanthropic tradition and continues to lead the world in many areas of voluntary action. All the major political parties acknowledge that the voluntary and charitable sector has a crucial role to play in finding solutions to social problems. But we should not be complacent. While there is much good in the charity sector, there is also much need for change in the way many charities are funded and managed. This is where our politicians and voluntary sector champions need to show leadership in proportion to the crisis our country now faces. So far, no one has come up with a comprehensive plan to reform the voluntary sector and use philanthropy and the power of business to remake the way our country is run.

Thirty years of market reform has been good for Britain’s rich and our society has become more unequal. Yet populist bashing of the rich is a blind alley. Instead we need to rewrite the social contract between the rich and the rest. The winners of capitalism have a responsibility to the rest of society, not just to pay their taxes but to give back with their money and their skills. By doing so, they can be a dynamic, entrepreneurial source of innovation in our society and so build a more sustainable environment for wealth creation.

The corporate world, too, is starting to realise that business can ‘do well by doing good’. The financial crisis has demonstrated that narrow-minded focus on short-term profits is bad for shareholders as well as society. Business needs to take a longer-term perspective on success, recognising that capitalism will only thrive if it sustains the society and the environment in which it operates. Before the crisis, some corporate leaders had started to lead the way towards a more responsible capitalism. After the crisis, the need is more pressing than ever.

No sector is under more scrutiny than finance. The crisis has given momentum to new thinking which says that finance should seek out social and environmental rewards, as well as profits. This social investment movement is gathering pace among mainstream as well as explicitly ethical investors, which opens up the possibility of levering the massive resources of the capital markets to do good.

We are also at the dawn of an era of mass philanthrocapitalism. In the same way that the internet has transformed the way we shop and the way we do business, it is starting to revolutionise the way we give. Kiva.org, Globalgiving, Donorschoose and Facebook Causes are taking the giving world by storm because they give even small donors the chance to see how their money is being used.

Britain’s economic crisis is an opportunity to take this movement further, to encourage more giving and to use philanthropy and social entrepreneurship to reinvent our public services. Adjustments to the tax incentives for giving may help at the margin but what Britain really needs is leadership to shift the way we think about the roles of public and private actors in social innovation.

This philanthrocapitalism revolution has already started in America. The Obama Administration and pioneering local politicians, like Mayor Michael Bloomberg in New York, have started to pilot new ways for government and philanthropy to work in partnership. Britain needs to follow their lead.

Philanthrocapitalism is not a party-political issue. It is an opportunity to create a new partnership of philanthropists, businesses and social entrepreneurs with government to build a better Britain for the 21^st Century. This manifesto sets out a plan to achieve three goals: more giving; more social investment; better philanthropy. We call on government, business leaders, the voluntary sector and donors to adopt this programme.

More Giving

The decision to give is a private one yet government can encourage giving with incentives and leadership. Similarly, corporate leaders can make giving a core value of their companies and an integral part of our business culture. Over the past 25 years successive governments have put in place measures to improve the tax incentives for giving. There are some useful changes that could be made at the margins to encourage philanthropy, such as charitable remainder trusts, or, more importantly, to streamline the unnecessarily bureaucratic Gift Aid process  – persistently low levels of take-up show this is broken. We need more active incentives for philanthropy.

Government funding to voluntary organisations has doubled under this Government to more than £10 billion a year, making much of the voluntary sector dependent on government grants and contracts. In these difficult economic times government should be looking for new funding mechanisms that crowd in rather than crowd out voluntary contributions. Early evidence suggests that “match funding” for universities, where the government tops up private gifts, has started to draw new donations to a sector that is crying out for resources and reform in equal measure. Match funding would be a way for government to encourage giving and direct those gifts towards issues where public expenditure cuts are likely to be the most severe and where philanthropic capital would add the most value, such as higher education, the arts and international development. A proportion of all government spending should be earmarked for match-funding partnerships with philanthropists.

Match funding is also a mechanism for stimulating giving from the wider public and as a way to democratise the way government and the lottery channel money to charities. We recommend that these match funds should be targeted on stimulating online giving in the UK through sites like Globalgiving, Localgiving, Kiva, the Big Give as well as new entrants to the market. 10% of all lottery funding and 1% of government funding for the voluntary sector should be ring-fenced for matching donations through online giving sites.

Giving rightly enjoys generous tax benefits yet these benefits should come with a responsibility to serve the public interest. At present, charitable foundations have considerable latitude in how much of their endowment they pay out each year and how they invest their money. For forty years American foundations have been required to pay out at least 5% of their assets each year to ensure that the taxpayers today who are subsidising giving get something back, rather than allowing those benefits to accrue to future taxpayers. The payout rule also encourages foundations to adopt less conservative investment strategies to grow their endowments faster, so they have more to give. Few British foundations pay out 5% of their assets each year. Some pay out practically nothing. Philanthropic foundations need to work harder for the public good, so should be required to pay out at least 5% of their assets each year.

Business is responsible for about 5% of charitable giving in Britain. We think it could do more, even though the recession is putting pressure on corporate philanthropy budgets. Enlightened businesses understand that giving back is not a cost to their PR budget line but an investment in the long-term sustainability of their business. Now is a moment for our business leaders to step up and show the way by getting more companies to give. We call on the CBI to make it a norm for British businesses to give 1% of profits to charity.

Business can also promote giving by putting more effort into payroll giving, which is an easy way for workers to take advantage of the tax subsidy to giving. Only 3% of British workers participate in payroll giving schemes, compared to 35% of American workers,and little more than £100 million goes through this mechanism. Business should be taking the lead in extending this scheme to all PAYE taxpayers and promoting giving to their employees with incentives like match funding. We call on business to ensure that all employees can participate in a payroll giving scheme and to commit to a target of trebling payroll giving in the next three years.

Giving is not just about money but also time and skills. The charity sector is crying out for trustees and advisers with managerial and financial skills. Initiatives such as Pro Bono Economics, which matches trained economists with charities that need help to measure the impact of their projects, are a welcome start. Opportunities to give back in this way are also becoming an increasingly important part of recruitment and retention strategies for companies. Government should do more to encourage this type of high-impact volunteering by offering tax incentives to companies that offer 1% of their employees’ time for voluntary work. Retired workers also have valuable skills that they could give back, and firms could do more to encourage and help them to do so. Pass a Serve Britain Act to incentivise volunteering, particularly among the highly skilled and experienced.

More Social Investment

We applaud the government for launching the Social Investment Task Force that reported in 2000. The major parties have rightly committed to the establishment of a Social Investment Bank using unclaimed bank deposits and we welcome the commitment in the pre-budget statement to pilot the Social Impact Bond, that improve greatly on existing private finance initiatives by incentivising improved social outcomes rather than merely lower costs. We urge government to accelerate the implementation of these initiatives and widen the pilot programme for Social Impact Bonds.

So far much of the work on social investment has focused on debt instruments. We now need to think about building a market for social equity risk capital as well. We call on the government to reconvene the Social Investment Task Force with a remit to make proposals to develop a social equity market, including a Social Stock Exchange.

The 2000 Social Investment Task Force focused on domestic investment in social progress. There are even greater opportunities to harness the capital markets in the fight against poverty and disease overseas and climate change, where public funding will be constrained in future years. The Commonwealth Development Corporation (CDC) is still too risk averse, focusing on projects with financial returns rather than high-impact social and environmental investments, and has failed to innovate.  Private firms and philanthropies, by contrast, have moved ahead with initiatives like the Global Impact Investing Network and the Aspen Network for Development Enterprise. It is time for government to catch up. We call on government to establish a Development Investment Task Force to explore the potential of this market and identify concrete initiatives that government can support through CDC or other mechanisms.

Foundations should be leading the social investment movement through active ‘mission-related investment’ of their endowments. A few, such as the Tudor Trust and Esmee Fairbairn Foundation, are leading the way but most foundations still think of their endowments as a source of investment income to fund grantmaking rather than a strategic asset that can be used for social benefit. American foundations like FB Heron are showing the way. The Charity Commission should be doing more to change foundation thinking, through its guidance on best practice (CC14). The proposed 5% payout rule for foundations could also be structured to give credit for social investments to encourage the use of endowments as a pool of social investment capital. We call on the government to use tax and other incentives to promote mission-related investment by foundations.

But this is just a start. The financial crisis is an opportunity for the mainstream financial sector – and pension funds, in particular – to do a better job of investing for long term value, as well as to show that it understands its wider responsibilities to society. We look to pension funds, which should be the long-term investors in our society thinking about the impact of their decisions on the shape of the world in 20 or 30 years time, to lead the social investment movement in the financial sector. We call on the major pension funds to show their commitment to long term thinking by signing up to the Global Impact Investment Network and supporting its work to develop agreed reporting standards on social investments.

We urge government and business to take this opportunity to make Britain’s financial sector a world leader in social investment.

Better Giving

Giving cannot and should not simply replace public funding, it should add value as ‘social risk capital’ free from the constraints on public expenditure. Government’s biggest problem when it comes to social innovation is risk aversion. Ministers and civil servants will not take on innovative initiatives which could be ridiculed in the popular press and where there is a risk of failure that could result in a critical grilling by the Public Accounts Committee. From education to counter-terrorism, government programmes will tend to play it safe. Nor are there any prizes for long term thinking beyond the three year public spending horizon. These problems are fundamental to government and cannot be fixed by yet another public service delivery reform initiative.

Rather, we should look to private initiative and social enterprise to test and pilot new ideas about how to tackle social problems, which government can take to scale once proven. This has been a central pillar of Michael Bloomberg’s time in office in New York. He has used philanthropic capital to fund initiatives that would not get through City Hall, which, once proven to be effective, are now financed from the public budget. To adopt this model in Britain, each government department should be required to identify key policy and delivery areas where it is looking for solutions and build a partnership with philanthropists and social investors to test new ideas in these areas.

Government’s commitment to take these ideas to scale, if proven to be successful, should be an incentive for donors to step up. It will also be a challenge to philanthropists and social entrepreneurs to look for transformational initiatives, rather than creating isolated pockets of excellence that never reach scale. Government departments should be required to report on their partnership strategies as part of their Public Service Agreements with the Treasury.

This will require a substantially different way of working from government departments, which have largely used voluntary organisations as contractors to deliver public services, rather than an engine of innovation. The Office of the Third Sector, which leads on government’s relationship with the voluntary sector, has been captured by the vested interests of the sector and has failed to challenge conventional wisdoms or engage with philanthropy in a meaningful way. The Office of the Third Sector should be scrapped and replaced with an Office of Social Innovation (OSI) focused on outcomes across government rather than serving the interests of a sector.

Local government is ideally placed to build partnerships with local businesses and philanthropists, building on the emerging community foundation sector and working in partnership with the regional development agencies. The Mayor of London’s Charitable Fund is a welcome initiative in this area, using the convening power of a political leader to bring funders together to work coherently across different tiers of government. A proportion of funding for local government should be ring-fenced for match-funding with philanthropists and social investors. These funds should be allocated on a competitive basis, with bids assessed on the basis of expected impact and with a sliding scale of matching so that deprived communities are more likely to benefit.

Match funding programmes like these will remain a small proportion of total public funding to the voluntary sector. The mainstream government funding for the voluntary sector needs to change as well. There is too little accountability for what public money channelled through the voluntary sector achieves. Too often it is a matter of faith rather than fact that charities are effective in delivering services. The public, too, has little information about real impact to guide their charitable donations. For example, the Department for International Development (DFID) gives more than £100 million a year to a select group of partner charities, without much accountability for what that money achieves, masking a huge divergence in the charities’ performance. By strengthening and publishing its performance assessments, DFID would be providing a service to help the public know which charities run the best humanitarian programmes, the best development projects and the best policy work. Government should take a lead in creating evidence-based performance frameworks for public money spent through charities, with quality assurance by the Office of Social Innovation.

Making public funding for voluntary organisations more performance-oriented and improving the information available to the public about performance will help to drive an improvement in the effectiveness of the charitable sector. The Charity Commission is already taking on some of these performance challenges through its work on compliance with the public benefit test for charities and by improving charity reporting. Change needs to happen faster.

There is still time to enter our competition to win a copy of the book, signed by Bill Gates, AND lunch with Matthew in New York or London, courtesy of the The Economist.

It’s free to enter. Just go here and click ‘Enter Sweepstakes’. Competition closes on Monday evening. Please tell your friends, and join our fansite while you are at it. Good luck!

Which has more power to change the world – millions of dollars of donations or thousands of facebook fans?

Michael spoke yesterday at the Legatum Institute’s Next Generation Philanthropy Forum, held at the Foundling Museum in London (which celebrates one of the greatest achievements of the golden age of joint stock philanthropy in the 18th century). Two and a half centuries ago, the Foundling Hospital used the state-of-the-art communication tools of the day – paintings by Hogarth and music by Handel – to drum up support to save the lives of abandoned children in London, so it was a fitting venue for a discussion of the way that the Internet and mobile phone are changing philanthropy.

In the new paperback edition of Philanthrocapitalism, we have added a chapter expanding on our discussion of the ‘mass philanthrocapitalism’ of sites like Kiva. While a huge part of its success has been to mobilise millions of dollars to help poor entrepreneurs in the developing world (a subject of some controversy currently, which we will return to in a future posting), Kiva CEO Premal Shah tells us that the ability to mobilise Kiva supporters to lobby government has the potential for what he calls ‘crazy impact’.

We were reminded of this comment at the Legatum event when Ben Keesey, the CEO of Invisible Children, talked about how its campaign to raise awareness about the plight of children caught in the conflict with the Lord’s Resistance Army led by the brutal Joseph Kony in Northern Uganda had led in two directions: fundraising to build schools and lobbying the US government to do more to end the fighting. Ben didn’t say which he saw as more important, but we are struck by the power of its campaign to mobilise hundreds of thousands of mainly young people in America to lobby political leaders about what might otherwise be a forgotten war.

The capacity of the mobile phone to provide real time information about conflicts was also brilliantly demonstrated by Julia Rotich of Ushahidi. Created in response to the violence that followed the rigged Kenyan elections of 2007, Ushahidi (the Swahili word for testimony) allows ordinary people to text information that is then used to create a map of what is really happening on the ground. The organisation is proud that this is an initiative created by Africans, and is now available as an open source technology that has already been used in other African countries to track supplies of essential drugs, and to monitor elections in Mexico and India. (Could this technology, we wonder, be used to add the perspective of ordinary people to the annual assessments of the quality of government in Africa run by the Mo Ibrahim Foundation?)

Dare we hope that a genocide like the one that happened in Rwanda fifteen years ago would be impossible today because orgnisations like Ushahidi, Invisible Children and Kiva would ensure that political leaders in the rich world would have to intervene? Now that would be the best kind of crazy impact.

Another chance to WIN an advance copy of the new paperback. Billionaire businessman Mike Bloomberg is expected to win a third term as Mayor of New York on Tuesday, having spent an estimated $85 million of his own fortune on the campaign (on top of nearly as big amounts on his previous campaigns).

Bloomberg says he is spending money in this way because of his commitment to public service, and that using his own money frees him from  the compromise and potential corruption that afflicts other politicians who have to raise money to fund their campaigns. He is no Silvio Berlusconi-style self-serving plutocrat.

What do you think – is this an act of philanthropy or plutocracy? Go to our Facebook fansite and enter our latest competition. We’ll choose a winner on election day, this Tuesday. Entries in by midnight on Monday, please. Good luck!

In the past week the British Government and the Conservative Opposition have each launched new policy papers on international development. Sadly, neither seems to have grasped the implications of the philanthrocapitalism revolution.

The Government’s White Paper is a worthy document covering conflict, economic growth, climate change and a host of other issues.There is a pledge to give more money to nonprofits, think a bit more about nonprofit performance and fund community groups to do ‘innovative’ work. But the paper is short on specifics. We would have welcomed a bolder statement about partnering with philanthrocapitalists and social entrepreneurs to test models that government can scale up, akin to what we are expecting to see from the Obama administration’s Office for Social Innovation. We hope that the British government will take the opportunity to work with philanthrocapitalists on creating a more challenging outcome-based performance framework for nonprofits involved in development.

The Conservative Green Paper acknowledges some of these problems but is rather unimaginative in addressing them. Again, there is more money for nonprofits, but the idea of how that can be a partnership to test models and help government aid work better is absent. This fundamental weakness is camouflaged by a rather gimmicky idea about creating a £40m pot of aid money that the public has a say in allocating. Press reports have likened this to some of the popular online giving sights that are driving mass philanthrocapitalism, but it is really a voting scheme to choose between relatively unimportant alternatives – the aid version of Britain’s Got Talent. This could increase public support for aid, it is true, and perhaps a worthy project will emerge as the aid equivalent of Susan Boyle. But there is no indication that this is intended to shape Britain’s core aid strategy.

A more radical approach would be to create a fund to match donations through champions of mass philanthrocapitalism globalgiving or kiva. By getting people to put up their own money, rather than voting in the abstract about where a small chunk of government money should go, it would be a more meaningful exercise and would give people a far wider range of choices. It could help to stimulate giving in general.

Both parties say they are committed to getting British government aid up to the UN target of 0.7% of national income (it’s just above 0.4% at the moment). Yet - and neither party will say this for obvious reasons - is that pledge realistic? A horrible fiscal crunch is coming, can aid spending really win the political battle over money for schools and hospitals at home? 

There is a lot of thinking taking place at the moment about for-profit models of philanthropy that could provide large sums of money for development, which could help fill the gap if government aid does get squeezed, and may anyway be more effective than much traditional aid. It is a pity that neither party put this on the agenda.

How do you encourage the innovation needed to make a better world? That was the theme of the excellent Incentive 2 Innovate (i2i) conference on June 8th-9th at the United Nations, in which both Michael and Matthew took part.

The conference was run by the X-prize foundation, which is trying to use incentive prizes to drive innovation and breakthroughs in genomics, energy and space travel.

Peter Diamandis, founder of the X Prize Foundation, says he originally used X as a placeholder for the name of whoever he would eventually convince to fund a prize. Now X is the brand!

A comprehensive paper on how to design prizes was the meat in the panel moderated by Matthew. The McKinsey consultants who wrote it showed that in the past decade there has been a sharp increase in “incentive prizes” (which encourage behaviour that the prize-giver wants), relative to “recognition prizes” (which celebrate past behaviour the prize-giver approves of). We welcome this shift in the book, as incentive prizes are likely to leverage far more bang for the philanthropic prize-giver’s buck.

Michael moderated a panel on innovations in global development.(Diamandis confessed to the conference that the X Prize Foundation it is still wrestling with how to define the rules for a prize in the area of reducing poverty (answers on a postcard to Peter).)

Michael described how he had seen the philanthrocapitalists shake up the development world with new ideas. He then challenged the participants to think about how the “customers” for global development, the poor themselves, can be integrated into finding solutions that really work.

Amir Dossal described the evolution of the UN Office for Partnerships, which he runs, that started with Ted Turner’s $1 billion donation – a gift in 1997 that really kicked off the philanthrocapitalism revolution, as we describe in the book. 

This partnership approach is now being embraced up by USAID, the development arm of the US government. Its Deputy Director for Partnerships, Carol Grigsby, talked about its first steps, under the Bush Administration, to reach out and engage innovators through challenge competitions and a new outreach website.

We have argued in the book for this type of partnership between government and the private sector, so we hope that these ideas spread.

The two other panel members came from the nonprofit world. Andreas Widmer (whose career includes serving as a Swiss guard to the Pope!) is carrying his experience as a technology entrepreneur into finding enterprise-based solutions for poverty through his Social Equity Venture Fund.  Charlie Brown runs Changemakers, an initiative of our old friends Ashoka, that is running competitions to tackle a wide range of problems, including education in Africa.

All the panelists recognised that they had a long way to go to really reach out and involve the poor in solving their own problems.Yet it is a good sign that thinking this way is on the rise.

  The spread of mobile phones across the developing world has huge potential to transform the development business. But, as one of the discussion groups at the conference pointed out, this will require finding new ways of framing problems so that these poorer customers can really engage with solving them.

A gloomy picture was painted in a recent report (sign-up required) by New Philanthropy Capital on the state of corporate governance in the British charity sector. The failure of boards in the financial sector is a hot topic at the moment. ”But while the recent costly failure of banks has highlighted the weakness of much corporate governance,” say the NPC authors, “the problems of charitable governance remain largely hidden from view.”  Boards, they say, are not holding charity executives to account for performance.  As a result, “charities may begin doing work that is ineffective or outside their mission.”

The report argues that the problem stems from the lack of accountability of charity boards. Directors of private sector companies know that they are (supposed to be) accountable to shareholders, whereas charity trustees’ responsibilities are diffused across donors, beneficiaries and regulators. Yet in these challenging economic times, it is essential that boards do not allow charities to coast and that they are willing to take tough decisions. Sadly, it seems that few are up to the job.

The solution rests in part with donors. Philanthrocapitalists should echo the for-profit sector by playing the role of activist non-profit shareholders, putting pressure on boards to ensure that managers deliver. But this is not just the responsibility of wealthy donors. As NPC points out, there is a dearth of willing trustees with the right skills. Giving time to support better charity governance is a high leverage donation that many people could and should make – and they do not even need to be rich to do it.