Thursday, January 26, 2012
An Insanely Great Week
There is some very interesting stuff happening in the textbook market - see my post at the College Open Textbooks blog.
Saturday, January 21, 2012
The Two Pillars of a Foundation
Do well. Then, do good. In short, that is what a foundation is all about. I recently heard a talk by someone who happens to work at the Hewlett Foundation, one of the country's largest, with $6 billion in assets. He's on the investment - "do well" - side, not the program or grant-making - "do good" - side. I think it's unfortunate that investing tends to be associated solely with the "do well" side, since making grants is a form of investing; it's just that the return is measured differently. But I'll stick with the convention.
Having some experience with investing to do well, and unrelated experience with nonprofits (such as College Open Textbooks, a Hewlett grantee I have helped out) which aspire to do good, I wanted to know: how does a foundation organize itself to do both at the same time?
Like most foundations, Hewlett keeps the "doing well" and "doing good" sides relatively independent, with the former sending the latter roughly 5% of its assets every year to fund grants. But in some respects, both sides engage in similar thought processes. Here are four common themes that span both pillars:
(1) Portfolio strategy
Before making any specific decisions, the investment side needs what you might call a portfolio strategy. For example, many investment managers would decide to allocate funds to three types of investments: stocks, bonds, and real estate. There are more decisions to make, however. What percent of assets should be in each category? Some managers will invest only in public stocks; others are willing to venture further. Some will restrict investments to a particular region, such as North America, while others decide to spread their investments across the globe.
The program side makes similar strategy decisions. What general themes should we focus on? In Hewlett's case, they've focused on things like education, global warming, performing arts, etc. If someone wanted a grant for vaccine research, I suspect Hewlett might turn it down no matter how compelling it was. From what I have read about the Gates Foundation, they might take a much more serious look.
(2) Analysis
Investment managers analyze more than the numbers: management, vision, ability to execute and potentially many other factors should be considered. It's the same on the program side. Both sides need to decide what information they will need in order to perform a proper assessment, then analyze the information when they receive it. If you've ever applied for a grant, you likely felt like it was a lot of work, and it is. Just remember it takes a lot of work to assess grant proposals.
(3) Risk
Ahh, our good friend risk. It is one of the most misunderstood areas of investing. You would think that investment managers try to minimize risk. You would be wrong. Depending on the objectives as well as how risk is defined, an investment manager might actually want more of it, to maximize "risk-adjusted returns." A common strategy is to make risky investments but mitigate the risks through diversification.
So it goes as well on the program side of the foundation. Neither the grant-seeker nor the grant-approver wants to see a grant fail. Yet the Hewlett Foundation knows that if they don't take risks, they’ll never accomplish big things. Wildcatters in the oil industry do not mourn a dry hole; it's a fundamental part of the business. The famous baseball player Babe Ruth set home run records; people conveniently forget the records he set for striking out.
In contemporary literature, failure is the new black:
Tavis Smiley titles his book Fail Up: 20 Lessons on Building Success from Failure. That's fine and dandy, but is it possible to build success without failure? Good question! Tim Harford answers it in his new book Adapt: Why Success Always Starts with Failure (you can read excerpts on slate.com here and here). Malcolm Gladwell strikes similar themes in Creation Myth. There is a class titled "The Art of Failure" at the Monterey Institute of International Studies (disclosure: I am a friend of the professor).
In fact, Hewlett takes steps to cultivate a risk-taking culture on the program side, celebrating failure as a key element of their program strategy. One example is an $8m grant they made to the schools of San Diego. When key members of the school board did not win reelection, the grant did not meet its objectives. Contrast that with Hewlett’s efforts in Open Educational Resources (OER), which they view as a grand slam home run by any measure.
(4) Time horizon
There’s almost exactly a 50% chance that the stock market will be higher tomorrow, and almost exactly a 50% chance it will be lower. In fact the person who gave the talk motivating this blog post, renowned in his field for investment acumen, went out of his way to say he had no clue what the stock market would do this year (others have won Nobel prizes for proving the wisdom of his humility). Intelligent investing involves thinking outside of the blinders that a one-day or even a one-year time horizon manifests. This is very hard. Evolution has given humans a good grasp of time frames from roughly seconds to weeks, but not the decades needed for intelligent investing.
Thinking on the right time horizon is just as important on the program side. In 2012 Hewlett is almost guaranteed to see both progress and setbacks. It’s only over long time horizons that powerful trends become apparent. As one Microsoft executive said, people consistently over estimate the progress that will occur in the short term, while consistently underestimating the progress that will occur in the long term. Open Educational Resources are a case in point. With Encyclopedias going in roughly 20 years from $1,600 apiece to free, how can we possibly imagine what will happen in the next 20 years?
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