The answer, Mr Brown argues, is a new Global Fund for Education to mobilise resources from private as well as public donors to plug the funding gap. (This idea has already won the backing of the British parliamentary select committee on international development, in their report on private foundations, to which we submitted evidence.) But is more money the answer? Mr Brown was a habitual spender when in government and is still locked into the idea that the more money thrown at a problem the better. If you only have a hammer, as the old saying goes, you see every problem as a nail. We fully agree with the argument that education really matters. The question is whether education is a nail that needs hammering with more money from Mr Brown’s proposed fund.

Mr Brown’s report is a remarkable testament to the way that philanthrocapitalism is changing how the world tackles problems. Ten years ago, inspired and influenced by Bill Gates, the world launched the Global Fund to fight AIDS, TB and Malaria as a unique partnership between public and private donors. Over the last decade, the Global Fund has disbursed $22 billion in 150 countries and innovated in the way that these diseases are fought. As a result, we are seeing real progress, against malaria in particular. Compare this to the Fast Track Initiative, which was launched by governmental aid agencies alone in the same year, with equally ambitious goals on education. Mr Brown’s report is an admission that Fast Track, which he says has been dogged by “systemic problems”,  has not been as successful as the Global Fund.

Mr Brown’s analysis of the comparative performance of the Fast Track and the Global Fund makes fascinating reading. The Fast Track, which is managed by the World Bank, has been bureaucratic, has struggled to innovate and has failed to mobilise much public or political support. The Global Fund, on the other hand, was based on partnership with private actors from the outset and has its own governance structure that gives developing countries a much bigger say. Though denounced by some global health experts when it was created, as a classic piece of philanthrocapitalist partnering with government, the Global Fund has proven its worth.

So why not a Global Fund for Education? First of all, the Global Fund for Aids, Tuberculosis and Malaria is but part of a wider mobilisation around these diseases. The Malaria No More campaign, in particular, has built up a grand coalition (what we call a posse) around ending this disease that has leveraged resources both to support the Global Fund and to work alongside it. Perhaps more importantly, the Global Fund is focused on ambitious but specific and doable goals. Indeed, one of the commonest criticisms of it is that it is a ‘vertical’ intervention to tackle specific diseases rather than develop the health systems of developing countries. What Mr Brown’s report shows is that, rather than a weakness, this may be its strength.

Ending malaria is a finite task that can be achieved even where governments are weak. It is also a problem that only needs to be solved once. Educating the children of the world will need sustained investment indefinitely, which relies on the will of developing country governments to invest in education over the long term. This is a point that Mr Brown’s review brushes over. One of the biggest laggards in providing education is Pakistan, where the literacy rate is a miserable 55.5%. This is not because Pakistan is poor per se, as other poorer countries such as Malawi do much better, but the result of a lack of political will. By framing the problem of global education as one of aid resources alone, Mr Brown is only telling half (if that) of the story.

Mr Brown also misses the point on the role that private sector could play. Yes, he wants businesses to be part of his Global Fund for Education, but only in a limited way: as providers of e-textbooks, as financiers and as advocates. None of these suggestions are bad ideas. But more radical thinking is needed. If developing country governments cannot or will not invest in education, then maybe the real potential of the private sector is to develop innovative alternative ways to deliver schooling. That suggestion is anathema to many development experts, who want to replicate the public service education models of the rich world and shudder at thought of the ‘privatisation’ of basic services like education. We understand why they worry in principle, but achieving real innovation may mean sacrificing such development holy cows.

The crisis in financing for development is, at last, getting the aid community to take philanthrocapitalism seriously. Yet Mr Brown and his peers still tend to see private donors and businesses simply as deep pockets that can be picked to make up for the increasing shortfall in government spending on aid. The much greater implication of philanthrocapitalism is that unleashing the creativity of the private sector, both for profit and philanthropic, will be crucial if humanity is to develop the full range of tools needed to tackle big global problems such as how to educate properly all the world’s children.

Here are our ten predictions for the coming year:

1. Greater scrutiny of the 1%. The role of the rich in setting the political agenda is going to be one of the big stories in the run-up to the US presidential election in November. Philanthrocapitalists hungry for impact are increasingly looking to get leverage by influencing government policy and this election will set the policy agenda for the next four years at a time when America (and along with it the world) faces some tough choices. We have, of course, been here before with George Soros’s support for the ‘Move On’ campaign in 2004, which was ultimately unsuccessful in unseating the incumbent president, George W. Bush. The influence of the Koch brothers on the right is already on the media’s radar, but there are plenty more to be discovered. Expect donors of the left and the right to pitch in to this contest using political donations and philanthropic giving to support policy thinking on issues like budget priorities and healthcare and school reform. Is this philanthropy or plutocracy? We will all be talking about that this year.

2. Nation building is back. Politics will also be a big theme of philanthropy around the world, which may bring with it genuine danger for those involved. From the nations involved in the Arab Spring to Vladimir Putin’s (for now) Russia, and maybe even North Korea, philanthropists are going to be getting involved far more than in recent years in supporting civic movements and even political movements in countries where there is a real opportunity to change the political balance, hopefully in a more democratic and just direction. As the year-end crackdown on various American backed non-profits by Egypt’s military government should remind everyone involved, those threatened by this philanthropy are unilkely to take foreign interference in their countries lying down.

3. Crunch time for Muslim philanthropy. On a related point, 2012 is going to be a year of decision for Muslim philanthropists. There is a huge opportunity for them to strengthen civil society in the Arab Spring countries and work with the emerging entrepreneurs and social entrepreneurs there. Pakistan and Afghanistan are both in need of high-impact philanthropy. Yet, with the honourable exception of the Aga Khan Foundation, too much of the giving from Muslim donors, including by some of the multi-billion dollar foundations set up by the rulers of Gulf countries and their leading businesses, is still focused on traditional welfare and charity rather than social change. Yet change seems likely to happen with or without them, and if they do not help it along, it may well be at the expense of the Muslim wealthy. Perhaps this is an area where Turkey’s emerging philanthrocapitalists will show a lead to the rest of the Muslim world.

4. Occupy Philanthropy. One of the big questions of the year will be whether the global Occupy movement will evolve from a necessary voice of protest into an effective force for change. There is an opportunity, and we believe an obligation, for philanthrocapitalists to help reform capitalism, so that it genuinely works in the interest of the population as a whole, not just a small subset of it. Andrew Carnegie understood the vulnerability of capitalism to the perception of it being inherently unfair; it is time today’s successful capitalists did so too. The gradually increasing pack of CEOs who get it, such as Indra Nooyi of PepsiCo, Paul Polman of Unilever and Sir Richard Branson of Virgin, have a huge opportunity to set the agenda for their peers, as long as they back up their words with serious action.

5. Steve Jobs, Philanthropist. After spending his life being fairly dismissive of philanthropy, the late co-founder of Apple is likely to be one of the most prominent additions to the mega-giving scene in 2012. His widow, Laurene Powell Jobs, has long been involved in giving, having founded an organisation to get students from poor backgrounds into college, participating in the Clinton Global Initiative and Global Philanthropy Forum, and visiting Africa on a trip for philanthropists led by Ben Affleck. Now she controls her late husband’s fortune, expect her to start putting it to good use.

We can also look forward to some weird and wacky philanthropy from new donors from the social media generation. The Facebook IPO is going to make a lot of people very rich and, since its founder Mark Zuckerberg has already signed up to the Giving Pledge, we are hopeful that the new cohort of wealthy will turn to philanthropy as a priority. The most entertaining philanthropist of 2011 was Silicon Valley venture capitalist Peter Thiel, who famously/notoriously offered $100,000 grants to get people to drop out of college and start a business, as well as supporting efforts to create new floating countries in international waters (“sea steading”) and launching a science fund closed to university academics, a large proportion of the people we normally think of as scientists. Plenty of people think Thiel is nuts, which is great. Too much philanthropy today talks about risk-taking without being willing to court controversy. Expect the donors of the social network generation to have no such fears.

6. Celanthropy’s new stars. Ben Affleck will become more prominent on the Hollywood philanthropy scene, though probably still lagging behind the likes of Brangelina, George Clooney and Matt Damon. The celanthropist to watch, though, will be Lady Gaga, who we expect to take a big step forward in her giving, probably with a cause dear to the hearts of her “Little Monsters” (as she calls her young fans). Another celanthropist worth watching will be Ashton Kutcher, to see if he can recover as a force for good following a messy divorce and some unfortunate tweeting in 2011. Despite his and other bad celebrity experiences, the use of Twitter and other social media in philanthropy will continue to increase – which should mean even more celebrity mishaps this year.

Some giving dynasties will also move more clearly into the limelight. Will Chelsea Clinton, as well as championing social causes in her new tv job, take a bigger role at the Clinton Global Initiative? Expect greater interest to be taken in Barbara Bush, daughter of George W, and her health care non-profit, Global Health Corps. And, now he is focusing on philanthropy, expect some bold initiatives from Howard Bufffett, grandson of Warren Buffett. Also watch out for the House of Windsor, as Britain’s Brangelina, “Wills’n'Kate”, make a serious effort to build a celanthropic brand, hopefully learning from the ability of Princess Diana to draw attention to an issue and the under-rated skills of Prince Charles as a social entrepreneur.

7. Deep Impact. This will be a big year for “impact investing”, which explicitly seeks both financial and social/environmental returns. So far, there has been much more talk than action, but the time has come for the money to back the ideas. The Omidyar Network has already taken a lead, but some other big philanthrocapitalists will join it this year. Enter the Gates Foundation?

8. The Great Extinction. Alas, it is going to be a tough year for many non-profits. We are braced for more scandals about inspiring narratives unsupported by facts, along the lines of the 2011 Greg Mortenson expose. The pain of government spending cuts will be felt widely, both directly, as many non-profits rely on money from government, and indirectly, as cuts to government services will lead to greater demand pressure on non-government alternatives. We think that many non-profits will be faced with serious shrinkage, and in many cases extinction. Our hope is that smart donors will grasp the nettle and try to manage this culling process, encouraging mergers wherever possible, so that the best of the non-profit sector is preserved or, better still, made stronger.

9. Philanthrocapitalism the Chinese way. There was some schadenfreude when the Gates-Buffett visit to China in 2010 failed to drum up new signatories to their Giving Pledge, although that was not the immediate goal of their mission. We expect philanthrocapitalism to become an increasingly important force in China in 2012, though it will have a distinctive local flavour. Instead of traditional American-style foundation-oriented philanthropy, we expect a wave of stories about corporates playing a key role in solving social and environmental problems through a version of “social investment”. China is now hitting a difficult stage of economic development when it needs to manage its use of natural resources, stop competing on low labour costs alone, start tackling potential drags on its competitiveness such as its rapidly ageing population, and deal with rising expectations among the populations. All of this requires a wave of innovation, which China’s philanthrocapitalists are well placed to lead.

10. Some good news. We are hopeful of some big breakthroughs that will prove that philanthrocapitalism works. Will some of the few remaining countries still hit by polio announce they are free of the disease? Will the death toll from malaria plunge even further and faster? We think so, and that as it does it will validate the “posse” approach to solving the world’s problems at the heart of philanthrocapitalism. Expect more new posse partnerships to be announced, similar to the Malaria No More campaign led by Ray Chambers, which has galvanised a powerful coalition of the willing. This is a time of growing scepticism about the effectiveness of government, international aid, and even of giving. Yet clear evidence of results may start to change the mood and persuade a growing number of people that philanthrocapitalism is worth the risk.

1. Giving 2.0 by Laura Arrillaga-Andreessen. “A philanthropist is anyone who gives anything – time, money, experience, skills and networks – in any amount to create a better world.” Thus begins a book that is at once inspirational, full of great examples, and full of practical advice for philanthropists great and small. The author, Laura Arrillaga-Andreesson, is the daughter of philanthropists (her father is one of the biggest donors to Stanford University), married to one of the new generation of Silicon Valley entrepreneurs who are turning to giving (Marc Andreessen, who started Netscape), and an innovative philanthrocapitalist in her own right, as the founder of SV2, a sort of venture philanthropy training organisation that we write about in Philanthrocapitalism. She has used her insights from the front line to write a compelling book.

2. Impact Investing, by Anthony Bugg-Levine and Jed Emerson. One of the hottest trends in philanthrocapitalism is to invest money in a way that consciously aims simultaneously to improve society and generate a financial return. Two authors who have pioneered this so-called “impact investment” have written a terrific book that serves both as a highly readable introduction to the field and an agenda-setting guide to how it should develop if it is to fulfill its considerable potential.

3. Three Cups of Deceit, by John Krakauer. A remarkable expose of the incompetence and deceptions of Greg Mortenson, a social entrepreneur and best-selling author of ‘Three Cups of Tea’, a book that inspired many to support Mortenson’s work to build schools in Pakistan. Anyone involved in funding, overseeing or running a non-profit (or, indeed, any mission-driven organisation) should read this book, and learn how good intentions and good anecdotes are not enough to ensure good results, without good management and good governance.

4. Give Smart, by Joel Fleishman and Tom Tierney. Two of America’s leading thinkers about effective philanthropy, and advisors to philanthropists, share their wisdom. As Matthew noted in a review in The Economist, the authors rightly argue that biggest problem for philanthropists may be that “they are essentially accountable to no one but themselves.” To avoid being tempted into a self-deluded belief in their own success, philanthropists should create systems that force them to hear what may at times be unpleasant truths about the ineffectiveness of their work, and to be constantly challenged to improve. Wise advice, as is much else in this book.

5. KaBOOM! by Darell Hammond. Social entrepreneurs who have both a vision and an understanding of how to execute it on a large scale are at the heart of philanthrocapitalism. Hammond, who fights for the right for children to play and to have playgrounds to play in, is one of the best, including through his innovative partnerships with organisations such as Home Depot and the Omidyar Network. He tells his story well.

6. Leap of Reason, by Mario Morino. Any list of effective venture philanthropists should include Mario Morino, the entrepreneurial force and conscience behind Venture Philanthropy Partners. This short book struck a chord because it wrestles honestly with the need that any responsible giver faces to measure impact and the difficulty of doing that right. As Matthew put it in a review in The Economist, Morino feels no need to “wrap his iron fist in a velvet glove” and tells it straight: his book includes a stark warning that government spending cuts are about to cause a crisis in the social sector that “will have an impact on almost every non-profit [organisation] in America, whether or not it receives government funds.”

7. Adapt, by Tim Harford. Not primarily about philanthropy, but about innovation and the necessary role that failure plays in it – yet including several great historical examples from philanthropy. One of our favourites tells of how a philanthropist bailed out the project to build the Spitfire fighter, later so important in winning the Battle of Britain in World War Two, when government funding dried up.

8. Screw Business As Usual, by Richard Branson and Jean Olewang. Actually a good read, with lots of good stories (not all of them about the bearded wonder himself), from one of the philanthrocapitalists we write about in our book. As Matthew noted in a review in The Economist, “the subplot of the book is about the growing influence in tackling the world’s problems of a small group of wealthy philanthropists and business leaders, and how Sir Richard has become a catalyst among them.” The book is a rallying cry for businesses to see the opportunity to ‘do well by doing good’ (although we doubt whether publicly-owned companies have the freedom to use shareholders’ money to take on the diverse range of causes that Sir Richard can as the owner of the Virgin Group of companies). An important and provocative read for business leaders nonetheless.

9. Do More Than Give, by Leslie Crutchfield, John Kania and Mark Kramer. “Catalytic philanthropy” is what these authors call philanthrocapitalism, and they provide some useful case studies of best practice. As Matthew put it in Stanford Social Innovation Review, despite a few quibbles, “this is an inspiring book, full of nuggets of wisdom and compelling stories of success, that should be read by every philanthropist who is serious about trying to change the world.”

10. Poor Economics, by Abhijit Banerjee and Esther Duflo. Quite simply the best book written on the practicalities of helping people in the developing world, and a powerful expose of the dangers of simplistic thinking. As we have noted before on this blog, “it is a fascinating, at times depressing, but ultimately thoroughly inspiring read.” If you haven’t read it, do so soon. If you have read it, read it again in 2012!

1) “A battle is going to rage over the relationship between profit and philanthropy.” And some. Within days of making this prediction, Muhammad Yunus launched a swingeing attack on the microfinance movement that he inspired, accusing many of thosewho have followed in his footsteps of charging extortionate interest rates to their clients to satisfy their for-profit shareholders. We thought that this attack, which we likened to devouring his own children, was unworthy of the Nobel Peace Prize winner and has if anything helped the politically-motivated attacks on microfinance institutions like SKS in India. (We were also saddened and angered by the Bangladeshi Government’s attacks on Professor Yunus and the Grameen Bank that he founded.)

2) We predicted a “growing trend towards the privatisation of aid”, as the fiscal problems of the rich world made cuts in official aid budgets almost inevitable. With the honourable exception of Britain, which (to our surprise) is sticking to its plan to increase aid to 0.7% of national income, those cuts have started to happen. That’s why ‘innovative financing for development’ has been a buzz-phrase of the year. For many campaigners this means the Robin Hood Tax, an idea that we think is well-intentioned but wrong, which was half-endorsed by Bill Gates in a special report for the G20 summit meeting in November where he offered a set of ideas on how to plug the global aid funding gap. Yet what was most interesting in the Gates report was not his ideas for fiscal policy but a set of suggestions about how a third of the money needed could be raised from private rather than public sources. We thought the proposals needed more work but the fact that the governments of world’s biggest economic powers need help from private citizens marks a significant shift in how the world tackles problems. Earlier in the year we had argued that the new public-private partnerships formed around causes like eradicating malaria represent the rise of the posse as the new organisational form in international relations. That analysis was reinforced by a new intergovernmental declaration on aid effectiveness made in Busan, South Korea, in November which officially put private actors centre-stage in global development for the first time.

3) “Quality of giving will become just important an issue as quantity”. That has been true of the aid world in general, where one of the highlights of the year was Esther Duflo and Abhijit Banerjee’s book ‘Poor Economics’. We hope that the conversion of some of our past critics, like Phil Buchanan at the Center for Effective Philanthropy, to the idea that philanthropic (and, indeed, public) investments should be based on rigorous evidence is a sign that the battle is now won. We were also heartened this year that both ‘Alliance’ magazine and the development boffins at the Institute of Development Studies have finally joined us in taking seriously questions about the effectiveness of foundations, and of Gates Foundation in particular.

4) We thought that the ‘hot topics’ for 2011 would be “school reform” in the US and “maternal and child health”. Our American prediction was spot on, where Diane Ravitch has been leading a backlash against the involvement of philanthrocapitalists in school reform. This is a sometimes ugly battle and one that involves getting stuck into politics, which is a sweetspot where effective philanthropy can make a big difference. On the global front we have to admit that, although there has been some progress, there has not been as big a push as we had hoped on maternal and child health, which is a tough problem linked to health systems and, crucially, the political will of developing countries’ own leaders.

5) “The most interesting country to watch in 2011 is going to be Britain,” we thought, because of David Cameron’s ‘Big Society’ agenda. Though this idea has left voters largely underwhelmed, Britain’s experiments with social investment are genuinely world-leading, from the social impact bond pilots to the new Big Society Capital social investment fund (which has just received a green light from the European Commission that could have blocked the deal on competition grounds as an illegal state subsidy). So far, however, the debate on giving in the UK has been rather disappointing, with a rather mediocre government White Paper as the main action. We are still optimistic, however, that Prime Minister Cameron’s foundering flagship idea has helped to spark a wave of innovation in philanthropy that will bear fruit in the next year.

6) “The relationship between taxation and philanthropy is also going to be pushed front of stage in 2011.” This has certainly been the case in the US, where a cut to the federal tax deduction for charitable gifts is still part of draft legislation to balance the budget. We oppose such a cut, but we do think that a serious debate is needed about how to ensure that any tax subsidy increases effective giving. Most of the nonprofit community looks at any talk about changing the tax subsidy to philanthropy, apart from increasing it, with horror. We think that this is a mistake. In this age of fiscal austerity, no part of society can simply ask for more subsidy. Nor is there much evidence that more tax breaks will lead directly to more (or, perish the thought, better) philanthropy. We have certainly tried to get the debate going in Britain that the generous tax treatment now available for philanthropy should come, at least, with a requirement that foundations should make a minimum payout each year of 5% of the value of their endowments. That the US already applies such a rule is, we believe, an argument that this is practical and possible.

7) Our call for more philanthropy to help tackle the deprivation and injustice that feeds extremism in the Muslim world was inspired by the then forthcoming 10th anniversary of the 9/11 attacks. It was offered more in a spirit of hope than optimism, since philanthropy has all too often found working in Arab countries or Pakistan to be ‘too difficult’. So we have been surprised and heartened by the events of 2011. And we are not talking about the killing of Osama bin-Laden. Rather it is the unfinished revolutions of the Arab Spring that have brought unexpected change to North Africa and the Gulf, popular movements in which social media has played an important contributory role. Philanthrocapitalists, especially local ones, played a role, and need to play a yet bigger one, to ensure that these revolutions achieve their full potential.

“Celebrity philanthropy will continue to boom.” Yes, it did. There is still no sign of Tiger Woods turning in a big way to philanthropy to redeem his tattered reputation, as we had predicted for 2010. Ashton Kutcher took a step or two backwards. But the year saw some big advances by some new kids in celanthropy, including Lady Gaga and Edward Norton, whilst experienced hands such as Bono, Angelina Jolie and Shakira each continued to develop their impressive philanthrocapitalistic brands.

9) “Mass philanthrocapitalism will increasingly turn to politics.” The most inspiring movement of the year, in the developed world, was the #Occupy protests that challenged the titans of Wall Street and the City of London to prove that capitalism should serve the 99% of humanity, not just the wealthy 1%. Agreed, #Occupy has been better at channelling anger than coming up with programmes of reform. Yet, as we argue in The Road From Ruin, real change in how our economy is run is only going to come if citizens exercise their power as savers and investors to demand a version of capitalism that focuses on creating long term value, not merely a fast buck. To continue to porogress, #Occupy needs a clearer agenda, which we believe should be philanthrocapitalism.

10) We finished with a provocation that “maybe, just maybe, 2011 will be the year when social enterprise jumps the shark.” Not that we had anything against social entrepreneurs, it was just that the term had become “so ubiquitous and now seems to cover everything from for-profit businesses that claim to have a conscience to old-school charities that you have to ask if it means anything at all.” Certainly social enterprise was overtaken in 2011 by a new range of buzzwords that tried to get a bit more granular about the process of social innovation and scaling. “Impact investing” was probably the hottest idea of the year, as everyone got excited about the potential of what JP Morgan at the end of 2010 had said would be a trillion dollar market in for-profit investing with significant and measurable social or environmental side effects. 2011 did not, however, see tens of billions of dollars of impact investing deals. Whether this new type of business really will fulfil its potential is still to be proven and, we believe, it will only really take off when it moves out of the ghetto of the existing responsible investing community and into mainstream finance. Indeed, the need for big financial institutions to take impact investing seriously was one of our reflections on the other big idea of the year – management guru Michael Porter’s ‘shared value’ concept. Porter, with his partner Mark Kramer, put forward this new terminology to describe how profit and social impact are not in conflict, even for big businesses. Similar ideas have been heard before about how for-profit businesses can ‘do well by doing good’ (including Jed Emerson’s ‘blended value’, and indeed in our chapter on ‘The Good Company’ in ‘Philanthrocapitalism’) but the endorsement of a big hitter like Porter marked a step forward and the idea did seem to be taken seriously by, at least, some business leaders.

So, not a bad year for us as seers. How will we do in 2012? Our predictions, we predict, will appear here shortly.

Introducing the debate, the SSIR observes that philanthrocapitalism is “a term that came into common parlance in 2006″ – when Matthew invented it in The Economist – “to describe the need for philanthropy to become more like for-profit markets with ‘investors’ and ‘social returns’, is becoming a social sector wedge issue. The reason? The increasingly uneasy relationship between markets, democracy, and economic inequality.” We are delighted that philanthrocapitalism is now getting the attention it deserves, though stimulating a debate about the role that philanthrocapitalism can play in briging about the right relationship between markets, democracy and economic inequality was why we wrote the book. The last chapter is all about the need for the rich to operate, in their wealth creation, consumption, political activism and philanthropy, within the context of a new social contract that urgently needed to be redefined.

We won’t rehearse at length here the arguments in the debate, as you would do better to read them for yourself. Suffice it to say, we think there is an urgent need for a debate on how to make philanthropy more effective, but “that debate must be based on real issues, not tired old dichotomies.” We raise four topics that we think should be top of the agenda. 1) How do we start a conversation about failure in philanthropy? 2) How can government change to work better in partnership with philanthropy? 3) How can businesses add to social value – not through PR-driven corporate social responsibility projects, but through their core business activities? 4) How can we get a greater focus on improving nonprofit performance and impact?

The debate is generating some interesting responses on the SSIR website, and we would be delighted if you want to continue it by commenting on this blog, too. These issues are too important not to debate them properly!

Howard’s is a great story. A devout Calvinist, Howard became interested in the state of Britain’s prisons when he took on the public office of high sheriff of Bedfordshire, which made him aware of the appalling suffering of inmates. With his inherited wealth from an upholstery business, Howard set about reforming the penal system not by giving money to the inmates but by lobbying for legislative change. This is an important lesson for those who think that there is anything new or different about today’s donors getting stuck into policy questions – influencing government has often been the highest impact way to use limited philanthropic resources.

Professor Cunningham rightly points out that this is a good example of how, in the world of philanthropy, there is nothing new under the sun. Yet he goes even further, arguing that Howard’s willingness to commit his own time and energy to the cause of prison reform around the world (Howard died of typhus, contracted during a visit to a Russian military prison) is not matched by today’s donors. This seems a rather odd assertion, given that philanthrocapitalists like Bill Gates and Ray Chambers are now committed full time to the causes they support. (Or will they only qualify as “committed” by Professor Cunningham’s standards if they die from malaria, which they are working hard to eradicate? By that measure, George Clooney is more committed than they are.)

Our more fundamental problem with Professor Cunningham’s analysis is that he does not, so far at least, use the history of previous golden ages of philanthropy to tell us about why philanthropy is booming today. Without such a theory it is hard to explain the similarities and differences between philanthropy past and present. We, on the other hand, do.

In a set of online bonus chapters to the book we describe how today’s philanthrocapitalism is the fifth golden age of modern philanthropy. Charity and philanthropy have existed since the dawn of humanity. Indeed, the first reference to philanthropy is in Greek mythology, when the titan Prometheus gives the gift of fire to mankind. (That earned a punishment from Zeus of being chained to a mountain in the Caucasus, where an eagle eats his liver on a daily basis. Until he was freed by Hercules.)

Yet it was only relatively recently that strategic philanthropy that is aimed at solving social problems rather than as a duty of faith emerged. This great transition took place in Renaissance Europe, an era when microfinance was invented and the idea of creating endowed foundations for perpetuity caught on. Why then? The drivers of this first golden age were the new, entrepreneurial wealth creators of the new capitalist system. These early philanthrocapitalists were members of the merchant classes, independent of old church and feudal structures and based in the new expanding cities that were on the front line of social change.

Professor Cunningham misses this part of the story, starting instead with what we see as the second golden age of philanthropy in the 18th century. Much of the energy of this movement, as he acknowledges, was the adaptation of the new organisational form in business, the joint stock company, to philanthropy. Hence many of the great philanthropic initiatives of this age, from the creation of hospitals in Britain’s major cities to the campaign against the slave trade led by William Wilberforce, were run as ‘joint stock philanthropy’ whereby groups of donors would collaborate by ‘subscribing’ to a cause with a donation. Again like today, 18th century philanthrocapitalists adapted the tools of business to achieve impact with their giving.

In the next programme in the series Professor Cunningham will look at what we call the third golden age of philanthropy, the Victorian era of enlightened businessmen when many of today’s biggest charities were created. Presumably the final show in the three part series will then turn to the fourth golden age of giving of Carnegie and Rockefeller (whose great innovation, the endowed foundation, was pinched from their 16th century English predecessors), and hopefully to the “new philanthropy” of the fifth golden age now under way.

We talk about these historical precedents and their lessons for today’s philanthropists in some detail in the book for two reasons. First, it shows how modern philanthropy has for centuries been driven by ideas from the business world. Second, it shows that golden ages of entrepreneurial wealth creation are typically accompanied by golden ages of philanthropy. Looking at the expansion of entrepreneur-led businesses not just in America but around the world, if history repeats itself again, the current golden age of philanthrocapitalism is only in its infancy, and may prove to be the most golden of them all.

Sir Stuart was on fine baronial form, teasing an audience gathered for the launch of a new global organisation designed to champion rational enquiry into charity performance, The Social Impact Analysts Association (SIAA). Is their effort to bring reason to giving doomed to failure? We hope not.

The idea that metrics of performance can and should be applied to philanthropy certainly provokes extreme reactions. Some in the charity sector grumble about the ‘Taleban’ of measurement zealots, led by New Philanthropy Capital (NPC), which was created in 2002 by a bunch of City types to do for the nonprofit sector what investment analysts have done for the financial sector. You get the irony. Since the catastrophic failure of the financiers in the crisis of 2008, it has been easy for charity sector types to argue that they have nothing to learn from the financial sector.

NPC has also found it harder than expected to gain traction with donors with its analytical reports and is now refocusing the business on helping charities rather than donors, a point that Sir Stuaart raised with some impish relish. (Yet there are also signs that the divide is slowly being bridged. Sir Stuart was also generous in his praise of NPC and, with caveats, wished SIAA well.)

There is an obvious fear from nonprofits that measurement means that the work of all charities will be boiled down to some single metric of impact or a place on a league table. But that is an argument for the proper, rigorous impact measurement that SIAA is trying to develop, not a reason for resistance. It is simply not good enough for nonprofits to say that they ‘believe’ or even ‘know’ they are having impact. In the past leading physicians would have sworn blind that leeches or ground up human body parts were miracle cures for diseases. Modern medicine grew out of scientific rigour and techniques such as randomised control trials that cut through subjective analysis to provide hard data on what does and does not work. Without hard evidence, how do we know that today’s nonprofits are not doing the equivalent of applying leeches to social problems? Sir Stuart’s argument that people are happy with such witch medicine is not an argument in its favour.

So we are fans of the SIAA and applaud the Bertelsmann Foundation that has been willing to back a cause that is both controversial and unsexy. But better metrics about nonprofit performance alone are not going to drive a much-needed productivity revolution in how we solve social problems.

Statistics will only have an impact if someone is willing to use them. Nonprofit boards should be the target customers for SIAA’s analysis. Yet too many of these boards are happy to be supine cheerleaders rather than playing a role as committed, challenging non-executives. This needs to change. (Maybe paying them would help – though as they are often chosen because of their capacity to donate, maybe not.)

Donors also need to change. Yes, that is happening already as philanthrocapitalist donors play a more active and challenging role in their grant-making but it is a transformation that still has a long way to go. Ordinary donors too are increasingly, through what we call mass philanthrocapitalism, being given the tools to drill down into what their money is achieving. Yes, Labradors and lifeboats still exert their pull but, with the right tools, we hope that it is starting to change. Also, what about beneficiaries? Organisations like Keystone Accountability are doing pioneering work to put the voice of nonprofits’ customers into the mix – a development that could really shake things up.

The SIAA also needs to think wider than just nonprofit performance metrics. Creating common impact measures in tandem with government could have massive leverage in helping to improve the allocation of public money. Government can also help social impact analysis by making sure that high quality public statistics are accessible, accurate and up to date. This is particularly important in developing countries. Statistics are a classic public good – it is in no one donor’s interest to fund the boring work of gathering data, yet that data is an essential tool for all donors to understand problems and measure their impact. We welcome that this week’s OECD High Level Forum on Aid Effectivness in Busan drew particular attention to the question of building statistical capacity (see paragraph 35 of the communique). We also hope that the recently-launched Open Government Partnership will help to drive a revolution in data transparency in rich and poor countries alike.

The final piece of the jigsaw is the private sector. And we are not talking about measuring the impact of corporate philanthropy. Businesses have massive social and environmental impacts, some good and some bad, through the resources they consume, who they employ, how they source and distribute their products, and so on. Though Corporate Social Responsibility (CSR) reporting is getting better thanks to mechanisms such as the UN Global Compact, we have a long way to go before corporate reporting really tells us the ‘total impact’ of a business’s operations. The SIAA should be building a common language with the corporate reporting gang (and the big accounting firms should be working with SIAA) to try to bridge this gap.

The SIAA is fledgling organisation with a potentially big agenda. We urge it to be bold, for there is a lot at stake.

They have done well: the Fund is now worth more than £300 million (at today’s prices the original gift would be worth about £24 million) and has grown at a faster rate even than the national debt. The bad news is that it is still a very long way off achieving its goal: the original gift would have paid off 0.007% of the national debt in 1927; today it would make a 0.04% dent in what the nation owes its creditors.

Hmmm. Given that the National Fund is not going to meet its goal within any meaningful timeframe we applaud the decision by Barclays Fiduciary Services, which took over the trusteeship in 2009, to re-examine its mission.

Unsurprisingly the voluntary sector has been getting rather excited at the prospect of some new cash. But how should it be used? Even if the National Fund paid out, say, 5% of its assets each year, that would amount to little more than £15 million a year of new grantmaking. So there would be no funding bonanza. Also, without a founder’s vision for its grant-making role, there is a risk that all the money would be handed out through mushy-thinking “spray and pray”, or would merely by used to prop up uncontroversial ‘national treasure’ type causes. So how the National Fund should spend its money is an important and interesting debate.

We believe that philanthrocapitalism means that donor intent does matter – both morally, since it was an individual’s decision to give the money away, and practically, since the donor can provide focus to the giving strategy. For the National Fund, this suggests that its giving should contribute to the goal of reducing Britain’s indebtedness. So here are five ideas that spring to our minds:

1) In America, Pete Peterson has endowed a foundation to work to put the country’s government finances on a sustainable footing, through a mixture of research, lobbying and supporting mass activism. Perhaps the National Fund could play a similar role in Britain?

2) Debt is as much a private problem as it is a worry for government. Total private household debt is around 100% of GDP. Reckless lending and high interest charges are also particular burdensome for the poorest. So perhaps the National Fund could play a strategic role in boosting financial literacy and improving credit services to the poor.

3) The burden of debt is dependent on how much you are earning. As we are seeing in the Eurozone at the moment, slow or negative growth makes debts much harder to pay off. Britain desperately needs growth. Even splurging the whole endowment of the National Fund would have a negligible real impact on the UK economy. Yet maybe some strategic giving could stimulate innovation that boosts future competitiveness. In America, the Kauffman Foundation has become an influential backer of policies that favour entrepreneurship, which again might be imitated in Britain.

4) More boldly, how about funding more blue sky research by science boffins? There is quite a lot of public and private money going into technology at the moment but less into ‘pure’ scientific research. Philanthropists looking for measurable results can be shy of funding unpredictable blue sky science. Yet it is from such discoveries that the next technological breakthroughs will come. One of the interesting stories in Tim Harford’s excellent book ‘Adapt’, which we reviewed earlier this year, is about how philanthropic donors, willing to back researchers for the long term, generated more impact than short-term public funders. So how about a National Fund for Science?

5) The donor who created the National Fund seemingly did not want to do grants. So why do grants? Instead, turn the National Fund into a pioneer social investor. This is a new market in which many hopes are pinned on Britain’s newly-created Big Society Capital. Turning the National Fund into a competitor in doing wholesale funding surely would spur innovation and increase the chances of social impact investing taking off. Doing this would (if all went to plan) preserve the original donor’s capital (albeit probably with a lower rate of growth than if it were invested simply for profit) and put private money into tackling social problems that would otherwise cost the government money to solve. It might also help the UK financial sector to develop a new area of  expertise for the City that is not only socially useful but potentially a source of global competitive advantage in the future.

Those are our ideas. What are yours?

The bad news was that giving by this group fell 8.7% in real terms, resulting from a drop in foundation asset values of 5.3% in 2008/09 (largely due to the financial market meltdown). The (maybe) good news is that endowment values bounced back by 7.8% in real terms in 2009/10, which the report says “will hopefully drive an increase in giving in 2010/11.”

Whether it has depends on the decisions of the foundations’ trustees alone. Unlike their counterparts in the United States, where foundations are required by the tax code to pay out a minimum 5% of their endowment value each year (based on a rolling average), UK foundations face no such constraint. We have argued that Britain needs a similar payout rule to America’s, a position that has earned us a few brickbats and snide comments from philanthrocrats happy with the status quo. We had hoped to see some action on this issue in the coalition government’s Giving White Paper published this year. Alas, we were to be disappointed.

This year’s ‘Family Foundation Giving Report’ offers ample demonstration of why the payout rule opportunity needs to be seized. Using the data in the report, we analysed the payout performance of the 30 largest foundations,  which account for £1.1 billion, more than 80% of the total sample. We found that:

1) The payout rate for this group as a whole fell from 4.9% in 2008/09 to 4.3% in 2009/10. Foundations have decreased their giving faster than the fall in their endowment values, at a time when their giving is needed more than ever.

2) The average was somewhat misleading, as it was raised by a few foundations run by living donors, which gave away a significantly higher proportion of their endowments’ value.

3) Twelve of the thirty foundations paid out less than the 5% American norm, including five out of the top ten: Leverhulme Trust (3.2%), Garfield Weston Foundation (0.8%), Esmee Fairbairn Foundation (3.4%), Wolfson Foundation (4.3%), and Children’s Investment Fund Foundation (1.6%).

4) If all of the top 30 foundations had each paid out a minimum of 5% (and those already paying out more continued their current strategies), from this group alone there would have been an extra £300 million in donations to the voluntary sector – not a small sum.

We admit that this analysis based on a snapshot is a bit crude. Grantmaking can go up and down over time at a particular foundation for perfectly good reasons, like ending an old strategy or starting a new one. (That said, 11 of the 12 foundations that paid out less than 5% in 2009/10 also did so in 2008/09 -though the Gannochy Foundation increased its payout to 5.4% this year, whilst Wolfson slipped to 4.3%.) Nor does volume of giving necessarily say much about the effectiveness of the giving. The Esmee Fairbairn Foundation, for example, has done good work in building up the nascent social investment market. We also have some sympathy with the Children’s Investment Fund Foundation’s argument that, as a relatively recent creation, its grantmaking, which is evidence led, will take time to responsibly scale up – though we don’t think it should use that excuse for much longer.

One foundation sticks out like a sore thumb as a candidate for Britain’s worst big philanthropy – the Garfield Weston Foundation. It is the second largest endowed foundation in Britain, after the giant Wellcome Trust, with assets of £4 billion (in excess of $6 billion – larger than the Packard or MacArthur Foundations in the U.S.) It has the lowest payout rate in our sample at 0.8% (down from 0.9% in 2008/09, and up to just 1.0% based on its recently filed 2010/11 annual report). For this one foundation, the gap between its current grantmaking and what it would be under a 5% payout rule is £170 million. Its grantmaking is also a case study in unstrategic ‘spray and pray’ philanthropy: in 2010 it gave away £34 million through more than separate 1,500 grants, averaging £22,000 apiece.

It is also a foundation that has courted controversy over its founding parent’s tax affairs, drawing the ire of the UK Uncut protest group that staged a sit-in at one of its flagship investments, the Fortnum & Mason grocery store on Piccadilly. (Whether it has done anything wrong is moot – here is one analysis.) The Foundation also had its wrists slapped by Charity Commission in 2010 for some political donations to the Conservative Party. (There is, we trust, no connection between this and the government’s unwillingness to talk about a payout rule.)

In Philanthrocapitalism we argue that giving has the potential to be a powerful force for positive social change. It is also an integral part of the social contract between the rich and the rest of society. The law allows donors to create tax-subsidised foundations as an encouragement for socially beneficial philanthropy. Does the British taxpayer get much value from its tax breaks to Garfield Weston Foundation, or indeed many other big British foundations?

This children’s rhyme should be going through the minds of the 2,000 aid bureaucrats who are going to descend on the South Korean city of Busan next week for the OECD’s High Level Forum on Aid Effectiveness. The Busan meeting will confront the fact that the system the world’s official aid agencies created six years ago to manage development assistance to the poor has been shattered by events. Their aim is to try to patch it up and put it together again. They would be better admitting that, like Humpty, it is broken beyond repair.

The Busan event builds on a landmark meeting of the OECD’s Development Assistance Committee (DAC) in Paris back in 2005, when the world seemed a very different place. Rich countries were gearing up for the G8 Gleneagles summit, where they were to make big new aid commitments (ahem, egged on by the chair of the summit, the then British Prime Minister Tony Blair, and millions of citizens who had rallied behind the ‘Make Poverty History’ campaign). The Paris meeting of the DAC created a framework for how this new money would be spent. Known as the Paris Agenda, these new guidelines urged donors to co-ordinate their strategies around developing countries’ own plans and cut out the duplication of effort in the system. All laudable stuff.

Jump forward to 2011 and the world looks much more complicated. The Paris agreement described a development landscape that was dominated by governments of rich countries (and their agents, the multilateral development institutions like the World Bank and UN that get their money from rich countries) helping the governments of poor countries. Since then, the global financial crisis has stifled much of the generosity of the rich world. Emerging countries like China and philanthrocapitalists like Bill Gates have also entered this space as new, significant players. The host of the Busan meeting, DAC Chairman Brian Attwood, acknowledged the significance of these new actors in a recent article. But the development establishment is still reluctant to accept the implications.

The message from the aid aristocracy who designed the Paris Agenda seems to be that philanthrocapitalists need to get in line and behave like government donors. For some time now this argument has been used by some global health experts, who complain that ‘vertical’ interventions like GAVI on vaccination, or the Global Fund for AIDS, TB and Malaria, distract from the country-led, planned approach to development set out by the Paris Agenda.

That theme  is echoed by a number of the papers commissioned for the Bellagio Initiative, a project funded by the Rockefeller Foundation but managed by the Institute of Development Studies to figure out the role that private foundations should play in development. In one paper, Robert Picciotto (a former head of evaluation at the World Bank) advises that “philanthropic organisations should sign up to the Paris Declaration on Aid Effectiveness and adopt the policies and practices that it implies.” In another, Kevin Watkins (a campaigner on education) warns: “Too much of the limited philanthropic support for education is delivered outside of government systems.”

You cannot blame them really. Donor and recipient governments have invested a lot of energy in creating this planning based Paris system of managing development financing. They are understandably reluctant to accept that the entry of new actors means that their plans have to go out of the window. But they should not try to put Humpty back together again.

The Paris Agenda has brought some benefits by reducing ‘project-itis’ by donors (a focus on funding specific projects, often carried out as ‘tied aid’ by a firm from the donor country), but it has also been behind the push towards simply writing cheques to developing country governments, known in the business as budget support. Donors like budget support because it is an easy way to shift large sums of money and is supposed to help to strengthen countries’ public financial management. There is also evidence that budget support does not do much good because developing countries’ cash the cheque but do not use the money to increase spending on the things that the donors care about like health and education, recipient government ministers often using it instead to fatten their own bank balances. (Budget support is also really unpopular with the taxpayers of developed countries that are financing these cheques, which worries the aid experts little but is a big problem when trying to persuade voters that this is a good use of their money.)

Telling philanthropists that they should behave like government also misses the important point about philanthropy’s comparative advantage – taking risks to do things governments cannot. For the aid establishment worrying about whether government largesse is going to dry up, philanthropy looks like a good way to plug some of the funding gaps. But to limit its role to that would be a waste. Better to let philanthropy take risks to drive innovation. (Michael horrified the Bellagio Initiative team with one suggestion about what type of risks philanthropists should take.)

Admittedly, too much philanthropy is still too risk averse. But that is all the more reason to be clear about the proper division of labour between governments and philanthropy rather than trying to get foundations to be even more conservative.

(One point on which we agree with the Paris gang is on transparency. Many official donors have signed up to being open about where and what they are doing, under pressure from the  International Aid Transparency Initiative. Only one philanthropic organisation, the Hewlett Foundation, has joined them. This is a huge missed opportunity. Why not be transparent? We hope that other foundations will see the opportunity and sign up soon.)

An even bigger problem is that the aid technocrats are apparently blind to a potentially enormous shift in how the world tackles problems – impact investing. The aid system of the past half century that the DAC meeting is supposed to manage is essentially a rather rickety and under-funded global welfare state, where taxpayers in rich countries subsidise public services like education and health for taxpayers in poor countries. There are respectable moral arguments for this approach, but rich citizens do not want to pay for it and the governments of developing countries are all too often unwilling or incapable of using the money in this way.

This system is also based on some rather out-dated maths that a transfer of 0.7% of the national income of the rich world would be sufficient to lift people in the poor world out of poverty. Rich countries, as a group, have never come anywhere near this target, even in the boom times, and anyway it probably would be woefully inadequate in the face of new challenges like climate change.

Impact investing is the idea that a lot of the financing needed to help the poor could actually come not from governments but from private investors putting their money into schemes that generate social as well as financial returns. So far this idea has been most developed in microfinance, where for-profit investors are now providing financial services to millions of poor people in developing countries. Similar opportunities are opening up in water supply, sanitation, healthcare, education and energy supply. Yet as private capital seeking a financial return, the impact investment market lies outside the aid-based vision of the development orthodoxy.

Many development experts are hostile to such private-sector led approaches because they fear that it undermines their project of building state welfare systems akin to those of developed countries. Though we understand and sympathise with the sentiment, is this really the best way to serve the poor? Rather than dogmatically defending rich countries’ 20th century welfare models, development thinkers need to be ready to figure out what the most effective models will be for the 21st century. Sadly, such issues are not on the table at Busan. As we were saying, “All the king’s horses…”