Monday, December 15, 2008

Curtains on cowboy philanthropy: a cruel lesson from the Madoff scandal

CowboyFrom Margaret Soltan's excellent coverage of the Bernard Madoff scandal comes this tip regarding the impact of Madoff's $50 billion scam on Jewish philanthropy around the world.

According to Jonathan Sarna of Brandeis University, an expert on Jewish history, Madoff's swindle represents "an unprecedented loss to the 'Jewish economy' — the networks of Jewish institutions, donors and charities that include universities, schools, hospitals and community centers." Among Sarna's many insights is his prediction
that the wholesale destruction of fortunes and endowments would prove to be a turning point in American Jewish institutional life, which over the past 20 years has moved from a model of community funding — collecting small donations from a broad swath of donors — to focusing on a handful of "cowboy" mega-donors who launched hugely successful programs like Birthright Israel outside of the traditional federation system.
Although the Madoff scandal has cruelly concentrated much of its pain on Jewish charities — exclusive reliance on Madoff investments has already forced the Robert I. Lappin Foundation, the Chais Family Foundation, and the JEHT Foundation to close — Jewish philanthropy is not alone in suffering the vulnerability exposed by Madoff's fraud. Charitable organizations across the spectrum, including law schools, have come to rely more heavily on "a handful of 'cowboy' mega-donors" rather than "small donations from a broad swath of donors." Reliance on a single benefactor, like its agricultural equivalent (monoculture), simplifies fundraising at a terrible price. Any instability in that single funding source spells doom for the entire enterprise.

Monoculture"Cowboy philanthropy," a neologism readily suggested by Jonathan Sarna's evaluation of the Madoff scandal's impact on Jewish charities, is ultimately as unstable and unsustainable as the "cowboy economy." The dreaded counterpart to Kenneth Boulding's "Spaceship Earth," the cowboy economy assumes boundless resources and prescribes no duties of stewardship. As long as the open range or a blameless, wealthy benefactor continues to supply new resources, cowboy economies will appear to operate smoothly, in the for-profit and the philanthropic worlds alike.

That assumption, as the Madoff scandal demonstrates, is deceptive and dangerous. Monocultures don't last. Even the best of benefactors has her limits — mortality, if nothing else. And Bernard Madoff, sadly enough, fell far, far short of the illusory beneficence he used to swindle private investors and charitable organizations.

In discussions of fundraising strategy — which after all is an essential function in educational administration at any level — I am surprised at how many professionals favor cowboy philanthropy over the more democratic alternative. The 2008 political season, so I might have thought, demonstrated the power of small gifts from a broadly distributed base of impassioned donors. But the prospect of a single, decisive strike still holds its allure. Far too many university presidents, deans, and development officers imagine themselves too busy to bother with face-to-face, "retail" fundraising unless putatively transformative money hangs in the balance. Bernard Madoff, alas, has provided negative support for a fundraising proposition that has swept Barack Obama into the White House: small donors on the upswing can open big doors. The broader world of philanthropy, beginning unfortunately with the Jewish foundations that put all of their trust in Madoff, now knows that big financiers on the downswing can wreak utter havoc.


Blogger Patrick S. O'Donnell said...

I left the following comment at the Legal Ethics Forum with regard to the Marc Dreier scandal and I'll paste it here because I think it is equally applicable to the Madoff scandal:

The somewhat neglected if not unduly forgotten Christian Socialist, R.H. Tawney, had something to say here that may be of relevance in sketching a bigger picture that helps us better understand the psychological issues [that often appear so opaque in cases like this], indeed, [enables us to discern] the intertwining of ethical, psychological, socio-economic and political phenomena:

By fixing men's minds, not upon the discharge of social obligations, which restricts their energy, because it defines the goal to which it should be directed, but upon the exercise of the right to pursue their own self-interest, [an acquisitive society such as ours] offers unlimited scope for the acquisition of riches, and therefore gives free play to one of the most powerful of human instincts. To the strong it promises unfettered freedom for the exercise of their strength; to the weak the hope that they too one day may be strong. Before the eyes of both it suspends a golden prize, which not all can attain, but for which many strive, the enchanting vision of infinite expansion. It assures men that there are no ends other than their ends, no law other than their desires, not limit other than that which they think advisable. Thus it makes the individual the center of his own universe, and dissolves moral principles into a choice of expediences. [....]

Under the impulse of such ideas men do not become religious or wise or artistic; for religion and wisdom and art imply the acceptance of limitations. But they become powerful and rich. They inherit the earth and change the face of nature, if they do not possess their own souls; and they have that appearance of freedom which consists in the absence of obstacles between opportunities and self-advancement for those whom birth or wealth or talent or good fortune has placed in a position to sieze them. [....]

The faith upon which an economic civilization reposes, the faith that riches are not a means but an end, implies that all economic activity is equally estimable, whether it is subordinated to a social purpose or not. Hence it divorces gain from service, and justifies rewards from which no function is performed, or which are out of all proportion to it. [....]

The characteristic fact, which differentiates most modern property from that of the pre-industrial age, and which turns against it the very reasoning by which formerly it was supported, is that in modern economic conditions ownership is not active, but passive, that to most of those who own property today it is not means of work but an instrument for the acquisition of gain or the exercise of power, and there is no guarantee that gain bears any relation to service, or power to responsibility. [....]

The truth is that we ought radically to revise the presuppositions as to human motives on which current presentations of economic theory are ordinarily founded and in terms of which the discussion of economic questions is usually carried on. [Amartya Sen in fact did this in his article, "Rational Fools: a critique of the behavioral foundations of economic theory," Philsophy and Public Affairs, 6 (1977); see too his little book, On Ethics and Economics, 1987.] [....]

It is obvious, indeed, that no change of system or machinery can aver those causes of social malaise which consist in the egotism, greed, or quarrelsomeness of human nature. What it can do is to create an environment in which those are not the qualities which are encouraged. It cannot secure that men live up to their principles. What it can do is to establish their actual social order upon principles to which, if they please, the can live up and not live down. It cannot control their actions. It can offer them an end on whcih to fix their minds. And, as their minds are, so, in the long run and with exceptions, their practical activity will be. [....]

[Society] must regard economic interests as one element in life, not as the whole of life. It must persuade its members to renounce the opportunity of gains which accrue without any corresponding service, because the struggle for them keeps the whole community in a fever. It must so organize industry that the instrumental character of economic activity is emphasized by its subordination to the social purpose for which it is carried on.

Please see Tawney's The Acquisitive Society (1921)

12/16/2008 9:30 AM  

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