Do the Forbes Philanthropy Scores Give Foundation Donors Too Much Credit?

valiantsin suprunovich/shutterstock

Every September, Forbes magazine updates their Philanthropy Scores for America’s wealthiest people. These scores certainly serve as helpful indicators of billionaire charitability. But the giving estimates behind the scores include some outlays from private foundations — particularly trustee salaries, impact investments, and certain other administrative expenses — that shouldn’t actually count as charitable giving.

We believe that a true measure of billionaire generosity would only include gifts that are no longer controlled by the donor or donor-controlled intermediaries in any way, and have flowed to nonprofits working directly for the public benefit.

How the scores work

Forbes’ Philanthropy Scores rank every member of the Forbes 400 — the 400 wealthiest people in the U.S. — by their lifetime charitable giving as a proportion of their net worth, on a scale from 1 to 5. The people at the top of the scale, with a score of 5, are those who have given at least 20% of their current net worth to charity so far.

To Forbes’ credit, they have improved their methodology. In 2020, Forbes changed its algorithm to count only “out-the-door” giving, or money going directly to working charities. The scores no longer count how much a billionaire has given to either private foundations or donor-advised funds.

Forbes is absolutely right not to include donations to foundations or DAFs in their scores because, as we have written previously, money going into these intermediary vehicles is at risk of being stockpiled rather than going out to working charities on the ground. It’s money that can sit unspent for years or, in the case of DAFs, potentially forever. By excluding intermediary giving, Forbes’ scores are more reflective of real generosity than the other major annual ranking of America’s largest donors, the Chronicle of Philanthropy’s Philanthropy 50, which includes individuals’ giving to both private foundations and donor-advised funds.

But Forbes’ new algorithm could still stand a bit of tweaking.

Charitable distributions aren’t always distributions to charity

Right now, if a person has a private foundation, Forbes counts the amount that the foundation has given out in charitable distributions as part of that person’s individual giving. The idea behind this is a good one: People should be given credit when they direct their foundation money out to charities working for the public good. But there are a couple reasons why Forbes’ specific approach gives us pause.

The measure that Forbes uses for charitable distributions is a complex metric called adjusted qualifying distributions, or AQD. Every foundation must calculate this amount on their tax returns because the IRS uses it to determine whether the foundation has met its annual payout requirement — the minimum 5% of assets that every foundation is required to distribute to charity each year.

But one problem with the AQD metric is that it doesn’t only include grants going out to working charities. It also includes a number of expenses that aren’t charitable distributions at all, such as trustee compensation; consultant fees for investment advisers, lawyers, and public relations firms; and the costs of meetings, travel, and office buildings. And AQD also includes the amount of any assets the foundation has put into program-related impact investments — investments in nonprofit or for-profit ventures that may earn lower returns than conventional ones, but where the social benefit from those ventures theoretically furthers the foundation’s mission and outweighs the reduced revenue.

Another problem with AQD is that it includes any grants the foundation may have made to donor-advised funds, or DAFs. These sometimes can serve as wealth-warehousing entities that technically count as charities, but which can become black holes from which charitable revenue can never escape. In our own research, we have discovered that all too many foundations fulfill their charitable distribution requirements by giving to DAFs. 

Examples of foundations where this matters

We can’t tell to what extent these issues affect the philanthropy scores of the Forbes 400, because Forbes doesn’t provide the lifetime giving amounts they calculated for each person. But when we looked at the private foundations of the billionaires who ranked highest on Forbes’ list — those who had scores of either 4 or 5 — we found several examples where these outlays do factor into their AQDs.

Trustee compensation

Not all foundations pay their boards of trustees, but some do, and they can count a portion of that compensation toward the amount the foundation is required to distribute to charity each year.

For example, the two foundations founded by cryptocurrency magnate Chris Larsen, who has a Philanthropy Score of 4, counted more than $700,000 of the $803,000 they paid in total compensation to their trustees in 2020. This amounted to 4% of his corporate foundation’s AQD and 9% of his family foundation’s AQD that year. Several other foundations run by people with scores of 4 or 5 — including Bill Gates, Warren Buffett, George Soros and Intel founder Gordon Moore — count millions of dollars of trustee compensation toward their AQD.

Some trustees may be employees whose work is directly related to the foundation’s charitable mission, while others may be family members, bank representatives, or the founders themselves. We would argue that regardless of the trustee’s role, no trustee compensation should count as direct giving to working charities.

Other administrative expenses

Many other types of foundation outlays can be applied to charitable distributions, and they can add up.

For example, the private foundation of hedge fund manager Jim Simons, who has a Philanthropy Score of 4, counted more than $125 million in non-grant expenses toward its 2020 charitable distributions, which amounted to 30% of its AQD that year. Among other items, this included $60 million in employee salaries and benefits; $14 million for travel, conferences, and meetings; $3 million for public relations and communications work; $2 million in legal and consulting fees; and a $10 million deposit for the purchase of a building (much of this is likely related to the Simons Foundation’s in-house research operation, the Flatiron Institute). Other foundations, including George Soros’ Open Societies Institute and Jon Stryker’s Arcus Foundation, applied expenses to their AQD that were worth more than 20% of the total in either 2019 or 2020.

While many of these may be legitimate outlays by the foundation that allow it to perform its mission and grantmaking duties, we would argue that they should not be counted toward the founders’ own personal charitable giving.

Program-related investments

Foundations can currently invest a portion of their assets in program-related investments, or PRIs, which are ventures that will theoretically generate a positive social benefit over and above a financial return. If a foundation can convince the IRS that an investment meets the criteria for being a PRI, the amount of that investment can be counted toward the foundation’s charitable distributions. 

Chris Larsen’s two foundations had $4.9 million invested in PRIs between them in 2020, which amounted to 31% of the foundations’ total adjusted qualifying distributions that year. Bill Gates, who has a Philanthropy Score of 5, had nearly $368 million of his Gates Foundation’s assets invested in PRIs in 2020, amounting to 5% of the foundation’s AQD. 

The jury is still very much out on whether program-related investments deliver the sort of social benefit they promise. But we would argue that regardless of any theoretical social return, no investment should count toward an individual’s giving to charity for the social good.

Giving to donor-advised funds

Private foundations are able to give grants to DAFs and to count those grants as grants to charity. And several of the foundations of the highest-scoring billionaires on Forbes’ list give big to DAFs.

Real estate magnate John Sobrato’s foundation, Sobrato Philanthropies, gave more than $44 million to identifiable donor-advised funds in 2020. This included over $36 million to DAFs at the Silicon Valley Community Foundation, $5 million to a DAF at ImpactAssets, and $3 million to a DAF at the Community Foundation of Santa Cruz. All in all, DAF giving amounted to a third of the foundation’s charitable giving that year. And Sobrato was not alone: foundations managed by Bill Gates, Michael Bloomberg and Lynn Schusterman all have given millions of dollars to donor-advised funds in recent years.

Since there is no minimum payout requirement whatsoever for DAFs, there is no guarantee that the money stored in them will ever make its way back out to working charities. For this reason, because Forbes is trying to measure billionaires’ charitability for the public benefit, they are right to exclude individual billionaires’ DAF giving from their Philanthropy Scores. By the same logic, DAF grants from billionaires’ foundations should be excluded too.

An ideal measurement of charitable giving

There are certainly high-scoring members of the Forbes 400 for whom none of these issues are a concern. MacKenzie Scott, the ex-wife of Amazon founder Jeff Bezos, has a Philanthropy Score of 5, having given away more than $12 billion to charity over the past two-plus years, and has done almost all of it through direct giving rather than through intermediaries. Carlyle Group co-founder David Rubenstein, with a score of 4, has so far given at least $700 million directly to many varied causes. For these people, the charitable waters aren’t muddied by foundation giving arcana.

In an ideal world, the same would be true for the others on Forbes’ list. Wealthy donors receive huge tax benefits for their charitable giving — benefits that are subsidized by the American taxpayer. In order to ensure that the taxpayer is getting a return on that subsidy, those charitable dollars need to flow to charities working directly for the public good. A true measure of how much billionaire philanthropy is actually going out the door to working charities would not include how much is going to trustees, consultants, for-profit companies, or banks — and we believe that Forbes’ Philanthropy Scores could be refined to more accurately paint this picture.

—

Chuck Collins directs the Charity Reform Initiative at the Institute for Policy Studies, where he also co-edits Inequality.org. His most recent book is The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions (Polity) and in 2016 he published Born on Third Base. Collins co-founded the Patriotic Millionaires and United for a Fair Economy.

Helen Flannery directs research at the Charity Reform Initiative and is an Associate Fellow at the Institute for Policy Studies. She is a longtime researcher and data analysis professional working in the nonprofit sector and has written extensively on nonprofit industry trends, including trends in direct marketing fundraising, online giving, sustainer giving, and the macroeconomic factors affecting donor behavior.