Warren Buffett piled up the world's third biggest fortune, $66 billion, by making smart bets. His philanthropy is another story: Eight years ago, Buffett pledged the bulk of his fortune to the Bill & Melinda Gates Foundation. And while that bet seemed pretty smart at the time, it's turned out to be a mistake.
Here are four reasons why Warren should back out of his pledge to Gates.
1. Bill doesn't need Warren's money to power his foundation
Back in 2006, Gates's fortune stood around $50 billion, and the foundation's endowment stood at $29 billion. It looked like Bill and Melinda could blow through that money pretty quickly as they tackled big global challenge like HIV and malaria. The infusion of Buffett's money seemed like a game changer that would allow the Gates Foundation to achieve and sustain the kind of scale that could really make a difference.
Things are different now. Not only has the foundation's endowment increased by at least a third, but Bill Gates keeps getting richer and richer. He now has $79 billion. Which is to say that Bill has plenty of money to finance the Gates Foundation all on his own, and to actually ramp things up. For example, if the foundation paid out 5 percent of its $40 billion endowment every year, and Bill kicked in another $1.5 billion of his own money, the foundation could sustain its current level of giving for at least 50 years. If the foundation tapped Bill's money to double its annual outlays, it could spend $7 billion annually for the next 15 years.
As things stand, though, Bill gave the foundation just $3.7 billion between 2002 and 2012, according a recent analysis by the New York Times. Since 2006, meanwhile, Buffett has given the Gates Foundation Berkshire Hathaway stock valued at $13 billion, according to the Times, and plans to continue to annually transfer at least 5 percent of his remaining Berkshire Hathaway stock holdings to the foundation for years to come.
This giant ongoing gift fails to meet one of the most basic tests of effective philanthropy: Does a funder's gift mobilize resources that wouldn't otherwise exist? Clearly, the answer here is no. Warren is spending money that Bill could spend instead.
2. There are limits to how much the Gates Foundation can spend
Of course, the above critique would be moot if the Gates Foundation really could ramp up to be a $7 billion-a-year operation and spend down both Bill and Warren's fortune over the next few decades in a way that achieved major breakthroughs. But it's not clear how possible this is. The foundation seems to face limits to how much money it can move out the door, and my own theory of why Bill and Melinda aren't investing more of their own wealth is that they're not yet sure it could be used effectively—either because they don't yet know what programs to scale up or the existing pipelines just aren't big enough to handle more funds.
The Gates Foundation may eventually overcome those limits and certainly there is no shortage of suggestions for the how it could spend more money (see, for example, this article by Buzz Schmidt). But as things stand, Warren's pouring his money into an operation that could easily be maxing itself out with a pretty modest infusion from Bill. Which is to say, again: Warren's money is superfluous here.
3. Warren is putting too many eggs in the Gates basket
Buffett made his billions through a diversified investment strategy. Berkshire Hathaway is an old-fashioned conglomerate, owning just about everything including railroads, private jets, insurance companies, furniture makers and newspapers. That strategy is brilliant because some of these holdings will be thriving at any given time, so Berkshire can weather shifts in the economy or consumer habits in a way that narrower companies cannot.
But Buffett has taken nearly the opposite approach with his philanthropy, betting very heavily on the Gates approach to giving while leaving a minority of his wealth to finance the wide range of strategies pursued by the four foundations his kids control.
This isn't the place to critique how Bill and Melinda Gates do philanthropy, but obviously that approach has attracted a fair amount of criticism, and one critique is that the foundation isn't creative or dynamic enough. Like business, philanthropy is a fast-changing field, and, as in business, large and bureaucratic operations can be left behind by newer and nimbler outfits. As an investor, Buffett never made the mistake of tying up most of his assets in a lumbering behemoth like GM or, um, Microsoft. But that's basically what he's done as a philanthropist.
4. Warren's kids could spend the money better
When Buffett made his commitment to Gates, his kids were still relatively new to philanthropy and hadn't shown what they could do with dad's fortune. For Buffett, giving the bulk of his money to a professional and scalable operation like the Gates Foundation surely seemed like a better bet than turning over that kind of money to Howard, Susie, and Peter.
Fast forward eight years and the situation is very different. Even as the Gates Foundation has proven to be less scalable than hoped, and rather rigid, Buffett's kids have emerged as extremely capable philanthropists.
I wrote a piece last month that walks through what Howard, Susie, and Peter are doing with their foundations, so I won't repeat all that here. Suffice it to say that Buffett's kids are tackling a range of major challenges—including hunger, women's empowerment and education—in a varied and creative fashion. At this point, putting the bulk of the Buffett fortune into scaling up a diversified portfolio of family philanthropy makes a lot more sense than sending it to the Gates Foundation where the money isn't really needed right now.
Can Warren back out of his commitment to the Gates Foundation? That's a good question.
Buffett's 2006 letter to Bill and Melinda Gates making his historic pledge to their foundation is a public document that you can read here. What I don't know is whether it constitutes a legal agreement, or whether there is a longer legal agreement that was signed.
Anyway, that would only matter if Warren was having second thoughts and there's no evidence that he is, although he has praised his kids' philanthropy and pledged greater wealth to their foundations from the portion of his fortune that has yet to be committed anywhere.
As a businessman, Buffett well knows that deals struck at one point in time may no longer make sense down the road. That's certainly the case here, and with Buffett still alive and well at 83, there's still time to revisit the deal with Gates.