Putting a face to human capital

Suzanne McKechnie Klahr was worried about getting along with El Gray. She barely knew him and they were flying from San Francisco to Boston, where they would spend several intense days together.

“Before we left, I thought, I’m going to have to sit with this managing director from Goldman Sachs for hours. What if we don’t get along?” remembers Klahr, the founder and chief executive of Build, a non-profit organ­isation that aims to teach disadvantaged children entrepreneurial lessons that get them into college.

Furthermore, she had essentially won him. Part of receiving a Goldman Sachs Social Entrepreneurs Award was a Goldman managing director to sit on her board.

As it turns out, her fears were unfounded. They not only got along but both agree the time spent at a Goldman-sponsored programme at Harvard Business School was invaluable. “The experience was fantastic – the school challenged the people who were selected,” says Klahr. Gray concurs: “People were really candid and engaged.”

Bridging the gap between the for-profit and non-profit cultures is what the Goldman programme aims to do. And its in-kind gift is typical of a trend in corporate philanthropy. The amount going to charities is increasing and non-cash gifts dominate.

According to data to be released soon by the Committee to Encourage Corporate Philanthropy and shared with FTWealth, a group of the largest comp­anies in the US gave more than $10bn in philanthropic aid last year, up from $7.6bn in 2004.

The CECP, which drew material from 88 of its 125 members, estimates this represents about half of all US corporate philanthropy. Even though the total amount increased, the philanthropy remained divided one-third to cash and two-thirds to non-cash gifts. In 2005, $6.7bn went to non-cash gifts and $3.3bn went to cash; in 2004 it was $5bn and $2.6bn.

“We’re over the Milton Friedman thing that you can’t give away shareholder dollars,” says Charles Moore, executive director. “But CEOs are more strategic today. They understand they should use their competitive strengths [in giving].”

According to the report, the median amount these companies gave was $32m, which was 0.9 per cent of pre-tax profits. The largest giving areas were health and social services (31.8 per cent), followed by community and economic development (13.5 per cent) and higher education (12.2 per cent).

For Goldman, the Nonprofit Leadership Programme, launched with people such as Klahr and Gray in 2003, is part of the company’s professional development programme, called Pine Street. It is also an institutional attempt to offer the bank’s human capital to non-profits, whose leaders may not have the same financial skills.

“It helped me because I’m used to rigorous analytics,” says Milton Berlinski, one of Goldman’s best known dealmakers and head of the financial sponsors group, who attended last month’s session. “It gave me a better understanding of how to lay out objectives when you are dealing with intangibles that can’t easily be measured.”

Berlinski has been involved in philanthropic work since he was a child in Aruba, in the south Caribbean, where his mother started several charities. Today he is a board member of the Ronald McDonald House, which helps children with cancer, and is involved with two other charities – the Robin Hood Foundation, a New York focused charity, and Adopt-A-Child, a South American group that pays for children’s education.

Yet for all his experience the HBS programme proved useful. “In the for-profit world you know what your goal is – it’s dollars and cents. You can motivate people and cut through the bureaucracy to get to that goal,” he says. “There is a disconnect with the non-profit world. There are a lot of people who give their time and they’re very methodical. The question is how do you make the organ­isation work best.”

Johnson & Johnson, whose philanthropy dates back to the 1906 San Francisco earthquake, gave $592m in 2005. But its giving in more than 50 countries illustrated how to stick to your strengths: $465m of its philanthropy was in products. “Philosophically, there is an overall strategic focus but then by region [subsidiaries] have the discretion on how to allocate funding under that strategy,” says Michael Bzdak, director of corporate contributions. “It’s worked quite well for many years.”

One of J&J’s oldest programmes involves training school nurses. Each summer 40 of them are brought to Rutgers University in New Brunswick, New Jersey, for classes ranging from HIV/Aids education to what to do during a natural disaster.

Last year, the company began an international expansion of another of its central programmes, “The Bridge to Employment”, which teaches ninth-grade students about healthcare careers. One of its subsidiaries, Centocor, was building a new plant in Cork, Ireland; it joined other J&J subsidiaries and four local non-profits to adapt the programme to the Irish school system.

“It started with Johnson & Johnson’s commitment to the community that was formalised 60 years ago in the credo,” says Bzdak, referring to the document that acts as its corporate compass.

Such enlightened self-interest is often central to corporate philanthropy – and many non-profits have come to depend on it. The Management Leadership for Tomorrow (MLT) programme was started in 1992 by John Rice, then a Harvard Business School student, with the goal of getting more minority students into business school. It now has programmes aimed at three levels – high school seniors, third-year college students who have excelled academically and young professionals applying to MBA programmes.

To accomplish its goals, MLT relies on 27 business school and 25 corporate partners. “This isn’t about ‘write us a cheque and help us fund our programme’,” says Rice, who notes most sponsors have also donated between $25,000 and $650,000 to the programme. “It is more about intellectual capital and unlocking expertise, so down the line there will be competent applicants.”

Whereas MLT used its corporate philanthropists to back its participants, Echoing Green has used private equity firms to help other non-profits sort out more basic structural issues. Initially financed in 1987 by General Atlantic, the private equity company, Echoing Green looks to fund entrepreneurs who aim to bring about social change with their ideas. One early recipient was Wendy Kopp, who founded Teach for America in 1989 with the goal of eliminating educational inequality. Echoing Green gave her $550,000 between 1989 and 1994. Last year its operating budget had grown to nearly $40m.

To generate that level of growth, Echoing Green stresses the importance of a solid business plan. To help non-profits develop one, it relies on young professionals, many in private equity.

The mixing of financial and non-profit worlds seems to have worked well for Klahr. With the help of Gray, her Goldman mentor, Build formalised its board and created a finance committee – an area Klahr says was “not one of my core competencies”. As a result, Build’s budget has doubled, and expanded from two schools to six, with two more planned for this summer. Other cities are now asking for Build’s advice.

Gray also learnt a good deal from his experience. “Because you’re not comping people at investment banking levels, their emotional connection to the place is as important as compensation,” he says.

“Suzanne and I don’t see eye to eye on everything but we had that core expansion. And that’s what made us good partners at Build for the last four years. It’s about taking the time to step away from your business.”