John D. and Catherine T. MacArthur Foundation last month
made headlines around the nation for unveiling the
latest winners of its "genius" grants.
earlier, the Chicago-based philanthropic institution,
one of the nationís 10 largest private foundations,
also was in the news, but this time the story wasnít
so flattering. Bloomberg News reported that the
MacArthur Foundation was one of several institutional
investors in a private-equity fund that bought into a
company that had a network of payday-lending websites.
lenders have been restricted or banned in most states,
accused of preying on working people who struggle to
make ends meet. The investment was more than just an
embarrassment for MacArthur. It represented a conflict
for the foundation that has a history of supporting
programs that help people living in poverty.
investment highlights a striking paradox in the
philanthropic community. Charities give away money to
improve the world but sometimes make investments that
controversy was magnified in 2007 when the Los Angeles
Times reported that the Bill and Melinda Gates
Foundation owned stock in several oil companies with
plants in Nigeria whose pollution was linked to
respiratory disease and cancer. At the same time, the
Gates Foundation had spent $218 million on polio and
measles immunizations in Africa and other countries.
contradiction between mission and money doesnít make
sense to people inside and outside philanthropy circles.
Why would a foundation fighting global warming own stock
in oil companies? Why would a charity that supports
health organizations also invest in tobacco stocks?
answers lie in the fiduciary duty foundations have. Many
foundations like MacArthur focus on maximizing financial
returns to increase grant-making dollars. To achieve the
best returns possible, foundations often put up
firewalls to make sure investment managers are
independent from the grant-making side of the
a statement, the MacArthur Foundation said it maintains
a diversified investment portfolio designed to achieve
"strong risk-adjusted returns." The
foundation, which has a $6.3 billion endowment, awarded
$228.4 million in grants last year to address issues
ranging from juvenile justice to housing to economic
foundation said its investment approach "maximizes
the philanthropic support we can provide to hundreds of
creative and effective organizations addressing critical
challenges in Chicago, across the nation, and around the
as issues of climate change, corporate governance and
social responsibility become more acute, the investment
strategies of philanthropic organizations are under more
scrutiny. Critics of the maximizing-returns philosophy
argue that philanthropic foundations should consider the
total consequences of their investment activities.
Miller, president of the F.B. Heron Foundation in New
York, asserts that foundations "have a duty that
goes beyond the typical investor."
14 years ago, the F.B. Heron Foundation began to invest
its $300 million endowment in securities that would
advance its mission of helping people escape poverty.
For example, the foundation invested in a private equity
fund that provides capital to growing companies that are
either located in or hire a large percentage of their
workforces from low-income communities in California.
serve the public, and we have a fiduciary duty of
obedience to our mission to make sure all of our assets
are doing the best job they can in service to the
mission," Miller said.
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F.B. Heron Foundation is on the cutting edge of a school
of thought that proclaims that values and profits can
easily coexist. Known as mission-related investing or
impact investing, the basic objective is to invest in
ways that enhance, not detract, from philanthropic
some high-profile conflicts that have come to light,
mission-related investing is not popular. A 2012 survey
by US SIF: The Forum for Sustainable and Responsible
Investment found less than 1 percent of U.S. foundations
pursued some form of sustainable and responsible
reluctance, because foundations worry that they will
sacrifice returns if they direct their investments to
align with their missions.
arenít easy discussions within foundations," said
Liz Michaels, chief of staff at Aperio Group, a
California-based investment management firm that
customizes portfolios to align with investor values.
"If your job is to perpetuate the foundation for
future generations, the question is whether this is
going to negatively impact your ability to do so."
more research is showing that the investment risk of
mission alignment is minimal, Michaels said.
investing also has received a boost from the so-called
occurs when institutions remove financial support from
select companies to promote certain behavior or policy.
The best known divestment occurred in the 1970s and
1980s when retirement funds, mutual funds and other
institutions sold off the stocks of companies that did
business in South Africa to boycott the countryís
system of apartheid.
a divestment campaign is targeting oil, coal and natural
gas companies for extracting fossil fuels that
contribute to climate change. A coalition of foundations
and individuals, known as Divest-Invest, has pledged to
sell investments in fossil fuels and redirect the
capital into clean and renewable energy sources.
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Sierra Club Foundation, which provides financial support
to environmental organizations, has joined the
Divest-Invest campaign. It may surprise some to learn
that the Sierra Club Foundation has holdings in fossil
Collins, who has recruited wealthy individuals to the
Divest-Invest campaign, explained that environmental
organizations sometimes hold stock in companies that
pollute in an attempt to positively influence their
all believed in the engagement strategy," Collins
said, "but itís just not worked."
Sierra Club Foundation said in a statement that it began
aligning its investments with its mission four years ago
and has removed most of its exposure to fossil fuel
companies. It estimates those holdings to be less than 1
percent of its portfolio and plans to divest the
remaining amount within the coming months.
of the nationís largest foundations have a
mission-driven component in their investment portfolios.
The MacArthur Foundation, for example, has set aside
$300 million, or about 5 percent of its endowment, for
year, MacArthur invested $10 million in a newly formed
real estate investment trust that acquires affordable
housing. MacArthur joined Citibank, Morgan Stanley,
Prudential Financial and the Ford Foundation as founding
exposure to a payday-lending business would seem to
undercut its support for organizations that preserve
affordable housing and strengthen low-income
communities, said the Heron Foundationís Miller.
donít think you have to invest in predatory lenders to
get enough money to help poor people in Chicago,"
Miller said. "I think itís a bad trade-off."
2012, MacArthur was a limited partner in Vector Capital
IV, a San Francisco-based private equity firm focused on
technology companies. According to the Bloomberg story,
Vector Capital made an investment in Cane Bay Partners
VI LLLP but didnít tell its investors the company is
in the payday-loan business.
spokesman Andy Solomon said the foundation had no say in
the investment decisions made by Vector Capital and
"was not informed at the time of the
investment" in the payday-lending business.
declined comment on when the foundation first learned of
the investment in the payday-lending business and
whether MacArthur remains a limited partner in Vector
Capital IV. According to the foundationís 2012 tax
return, the most recent available, MacArthurís
investment in Vector Capital IV was valued at $4.2