Warren Buffett’s recent pledge to the Bill and Melinda Gates Foundation goes against his “standard operating procedure,” but at the same time reinforces some of his long-held views. John McLeod highlights the contradictions in Buffett’s legacy.

The world now knows that its second richest individual, Warren Buffett, intends to give the vast majority of his wealth to the Bill and Melinda Gates Foundation, with the remainder going to his late wife’s foundation (the Susan Thompson Buffet Foundation), and the foundations of his three children.

This year he will make the first instalments by giving away 5% of his fortune, and he will continue giving at the rate of 5% of the remaining balance each year until he dies.

For the Gates Foundation this will mean an inflow of about US$1.5 billion per year, which will roughly double the foundation’s giving capacity. One of the conditions for the gifts continuing is that either Bill or Melinda Gates must have an active role in running the foundation.

Against the Grain

The Buffett gift is significant for reasons other than its size. While the annual gifts to his children’s foundations can be added to the corpus, the Gates and Susan Thompson Buffett Foundation gifts must be spent in the year following the gift (after allowing for an initial two year capacity build up).

Buffet’s demand that the gifts are not accumulated by the foundations is counter-intuitive to Buffet’s usual style. He has always been an investor, not a spender, and his strategy has always been to hold for the long-term and reap the rewards of compounding. His 40 years of returns above 20% is testament to these principles.

The requirement to spend the funds as they are received puts additional demands on the Gates Foundation’s ability to achieve relatively quick social returns. Since Gates says “there is no reason that we shouldn’t be able to treat the top 20 diseases,” it seems finding large problems to solve won’t be an issue.

With the Grain

Buffet is renowned for his in-depth research into the companies he invests in, and this is one of the factors behind his status as the world’s second richest man.

By choosing to give the vast proportion of his wealth to the foundation of the world’s richest man, he is showing he has done his homework. He is giving it all away to someone whom he thinks will do a better job of grant making than he would, thereby ensuring he will get the best return on his investment.

Two other aspects of this mega-gift show Buffet is remaining true to his beliefs. Firstly, it highlights his strongly held dislike of dynastic wealth (“a very rich person should give his kids enough to do anything, but not enough to do nothing”).

It also illustrates his desire for the retention of estate taxes as he plans to leave the bulk of his remaining estate to charity.

The Buffett Gift in Perspective

The chart provides projected giving levels of the USA’s almost 70,000 foundations and shows the influence of the Gates Foundation since it commenced in 1994 (renamed in 2000). The Buffett gift is included in the Gates Foundation projections (from 2009 onwards after the initial two year capacity build up).

Projected annual giving by the Gates Foundation of over US$3 billion per year largely on global health issues can be put into sharp perspective when compared to the support given by other significant organisations. Expenditure by the US government on overseas aid projects last year was US$27 billion; the UK government gave US$11 billion; and Australia provided US$1.6 billion.

Comparisons with other nonprofit organisations are also interesting. Last year the United Nations Development Program contributed US$4 billion, UNICEF spent US$2.2 billion, World Vision International – US$2 billion, CARE USA – US$500 million, Oxfam International – US$400 million, and the International Committee of the Red Cross- US$745 million.

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