The business of philanthropy
Philanthropy is at times more difficult than running a business, says hotel and real estate tycoon Lawrence Chan. Chan’s Seal of Love Charitable Foundation doesn’t suffer from a lack of money but a lack of suitable opportunities, according to the former CEO and founder of Hong Kong-based Park Lane Hotel International and C&L Financial Inc., which develops and operates hotels and real estate projects across the US and Asia.
“My biggest issue at the present moment isn’t the flow of funds because the foundation is majority funded by myself and the family fortune,” says Chan. “My biggest hurdle right now is trying to identify the proper channels and destinations as well as NGOs that fit the mission statement and are able to utilise the resources of the foundation effectively and efficiently.”
Asked about his personal fortune, Chan says: “I don’t know my actual wealth but the Foundation itself is substantial.” So while Chan works full-time in managing the charity, his younger brother runs the family’s business.
‘Charity is hard work’ Chan, who had spent 25 years in San Francisco, sold his US businesses, which included the Renaissance Parc 55 hotel and the Oakland Marriott, in 2007.
“At that time, I sensed that the macroeconomic picture was moving from West to East,” says Chan. “I was thinking I would use the sale proceeds to restart my business activities here because I believed that in the next 20 years, growth will be in Asia.”
However, the global financial crisis of 2008 drastically altered Chan’s plan. “Many of my associates went from extremely wealthy to financially desperate and seeing that gave me a different perspective of life and made me asked whether money should be the purpose of my remaining career.
“I created this foundation and hope that it will also be a platform for other people to participate if they believe in the foundation’s mission statement.”
However, running a charity is hard work and the challenges range from identifying opportunities, training and guidance of management teams, benchmarking and analysing quantifiable returns to battling corruption.
Philanthropic capital can be seen as society’s ‘risk capital’, able to support experimentation with new approaches to intractable social problems, says David Hayward Evans, UBS AG’s Asia Pacific Executive Director and Head of Philanthropy and Value-based Investing.
“Money certainly doesn’t equate to solving problems,” says Evans, adding that the world has seen the greatest experiment in both the power and limitations of big-time philanthropy in the last 10 years with the Gates Foundation.
“I am trying to apply the business acumen that I have accumulated over the last 30 years,” says Chan. Part of the process involves applying “the law of leveraging.” Chan says he aims to provide not just financial resources to non-governmental organisations (NGOs) but also guidance on how to grow organically.
Finding a model that works A model that Chan has applied involves approaching local universities to find students who are in need of financial help and offer them scholarships in return for their assistance at an NGO.
“In exchange for their scholarship, they would have to commit say five hours a week to work at a particular NGO and the NGO would have to provide a progress report about the student,” says Chan, who is also the Foundation Board member of San Francisco State University “It is two-way leveraging with one scholarship - the NGO benefits and the student benefits.”
Chan says to feed a person when he is hungry or send him to a doctor when he is ill, may be helpful in one-off situations but is difficult to sustain over the long run. “When the funds dried up, nothing else happens,” says Chan. “Instead of just giving them fish, you teach them how to fish and before you teach them how to fish, you have to ask them to commit to teaching others how to fish.”
A philanthropist should have a theory of change before embarking on any social and charity work, according to UBS’ Evans. A pilot project can then demonstrate the efficacy of that change model, paving the way for broader scale-up if successful, or a new theory of change if unsuccessful.
A theory of change involves quantifying the nature of the change, adopting the right partners and vehicle models to achieve that change, Evans says. Models should potentially be scalable, either through the private sector, or governments, he adds.
Models in philanthropy There are a variety of models in philanthropy. “Traditional grant-giving philanthropy is a model that retains its validity. If you find a great organisation that is already doing what you want to do and has a track record, there’s no reason to re-invent the wheel. The simplest way to achieve your goals may be to provide more resources,” says Evans.
The venture philanthropy approach involves bringing in new expertise and technology and introducing “elements of sustainability”, seeking to bring an existing organisation to a new level. “It is very similar to the approach of a venture capitalist in the for-profit arena.” Social impact bonds are an emerging asset class in the social sector, which link financial flows to the outcomes of social programmes.
While for-profit investors often have “exit strategies,” similarly philanthropists too need to be mindful of their giving horizon, says Evans. “Ultimately the best exit strategy for a philanthropist is to address the underlying causes of the problem he or she wants to address. Simply treating the symptoms of a problem can become an endless task, and create a culture of donor dependency.”
Another difficulty in philanthropy is in quantifying the return from money that was given away. “In the financial world, you can use return on investment, whereas in philanthropy it is very hard to benchmark and this also becomes an obstacle for people who want to donate,” says Chan.
“In some sense I can quantify the value of the scholarships because the students are actually contributing to the NGO by working a number of hours but I still can’t quantify the impact on the organic growth of the NGO.”
Tackling the challenges According to Evans, quantifying the effects of philanthropy is a challenge despite the evolution of a variety of standards. As the number of indicators rises, philanthropic work risks being consumed with the collection and the analysis of the data. “You need to have due diligence of your partners and on outcomes, but you mustn’t become over-reliant on some of these very complex monitoring and evaluations systems which can become an end in themselves.”
UBS’ advice is for a more medium approach. “We tend to recommend something that we call the critical path, which is not going to have your grantees and partners spending their whole lives basically filling in forms.”
“We encourage clients to think about a trajectory of key indicators in a single line, which will get them over time to the change that they want to bring,” says Evans. “Funding follows achievement and verification of performance of the indicators along the critical path, with the ability to adjust the path as evidence comes in of what works, and where further support may be most effective.”
Fighting corruption Another major problem in charity work is corruption. “It is difficult to monitor whether your money is deployed properly, particularly in third world countries,” says Chan, who once found out that a local charity founder was using his funds to buy real estate for herself. “Doing business in third world countries is difficult, not to mention philanthropy.”
Chan says he travels about seven to eight times a year to meet with the NGOs and to conduct “due diligence.”
“The only thing to say is of course maximum due diligence and oversight; third party evaluation and absolute clarity that what will happen if this is discovered,” says Evans. “The other situation you never want to get yourself is when there is something funny going on, you are worried about your end beneficiaries.”
Evans also advises philanthropists to take note of what is termed “absorption capacity.” “Some organisations may have been operating on a shoestring basis, and simply don’t have the systems in place to scale up rapidly and responsibly. Problems can emerge with partners receiving funds to meet performance targets, or the ‘re-programing’ of funds towards new uses, not necessarily intended by the donor. Quite simply, too much money too quickly can spoil good small organisations.”
A common problem with many NGOs lies in their inefficiencies in the deployment and utilisation of resources, according to Chan. “When you grant financial resources to them, there is a lot of wastage.”
A further problem is that data and indicators that are used to gauge fund flows and the effectiveness of the programs designed to help a social cause may also be subject to manipulation and outright fraud, says Evans. “The quality that you get out depends on the quality of the data that goes in.”
While there aren’t quick fixes to the corruption problem, Evan says one potential solution is to invest in an appropriate level of management. “Investing in an effective management team can be highly cost-effective, and improve systems and processes. Only the proper checks and balances will lower the potential for leakages.”
To overcome corruption, Chan says he gives “non-financial resources to the extent possible.” “I give local grassroots organisations students, manpower and labour rather than giving them money to hire someone and in situations whereby I have to give financial resources, I would rather to give directly to the university or the hospital.”