Who has created more social value: the charity or the business?

By Martin Vogel

Carnegie funded hundreds of public libraries, like this one in Teddington

The Economist draws on the centenaries of two major institutions – the technology company IBM and the philanthropic Carnegie Corporation – to assess whether the commercial organisation or the charity has contributed more to society.

IBM wins. But only over the long run.

The Carnegie Corporation had exponentially more impact in its first 50 years when its power “in some respects equalled or exceeded that of the state”. One of Andrew Carnegie’s objectives was to create a model of social responsibility in antithesis to the European model of intervention by the state.  He funded a wide range of interventions to nurture the public realm:

With its benefactor as its head for the first eight years, the Carnegie Corporation operated largely as a treasury and headquarters for a host of other institutions and philanthropic initiatives that he had started earlier—including his most famous programme, which ended up building some 2,509 libraries, most in America.

After Carnegie’s death in 1919 the foundation continued his strategy. It seeded or supported a broad range of strong private institutions, many of which carry his name. Institutions that benefited from his money range from the Carnegie Institute of Technology (now part of Carnegie-Mellon university) and the Brookings Institution to the National Academy of Sciences and the pension fund for university teachers now known as TIAA-Cref. The foundation and sister organisations commissioned research that would help shape entire professions. The Flexner Report of 1910 led to the overhaul of medical education, inspiring similar efforts focused on the law and on teaching.

Among the Carnegie Corporation’s other achievements were its funding of social research which helped paved the way for civil rights for African-Americans and of medical research which led to the treatment of diabetes with

The founder of IBM, Thomas Watson, also pursued philanthropic objectives, but The Economist locates IBM’s social impact primarily in its commercial performance: a stockmarket value today of about $200 billion and a source of employment for 427,000, many of them in the developing world:

Jobs, as well as profits are in themselves a measure of IBM’s achievement. Because firms sell something that people want, they make the world a better place in ways charities do not. In particular, companies create what is known as “consumer surplus”—the difference between the market price and what a consumer would be willing to pay. This surplus benefits society, not shareholders.

IBM machines supported aeronautical research

The Economist reckons the impact of IBM has been considerably greater than of the Carnegie Corporation in the second half of their centuries:

It has sponsored—and ultimately benefited from—a continuous series of innovations, from the mainframe to the personal computer, services and cloud computing. Its corporate philanthropy has grown steadily, so that its annual grants now exceed those of the Carnegie Corporation. It has also tackled policy challenges in a head-on, Carnegie-esque way. In 1996 it became the first company to convene a summit meeting on American education. Out of that came a commitment to find ways to measure school performance, which IBM helped to develop.

Judged on the past 50 years, there is a strong case for saying IBM has had more impact than Carnegie—especially if you count its accidental contribution to philanthropy by incompetently failing to stop Mr Gates from creating Microsoft. In part this is because its business, the management of information, has unusually large social benefits, and causes relatively few social or environmental costs.

In future, IBM expects to play an even greater role in profitably solving social problems by working with governments. “Everybody says they’re unsolvable—safe borders, clean water, energy. But the application of technology can solve a lot of these things we wrestle with,” points out Mr Palmisano [IBM’s Chairman and Chief Executive]. Firms in other, dirtier industries may not compare against philanthropy so well.

In this period, the Carnegie Corporation has been eclipsed both by the much larger role of government and by larger and more innovative philanthropic organisations.

The qualification that IBM operates with relatively few social or environmental costs is significant but does not, I think, invalidate the overall verdict The Economist reaches that IBM has had the greater social impact.

The experience of the Carnegie Corporation raises the question of whether charities do their best work in their early years.  The longer they stick around, the more they risk sheer institutional momentum rather than intrinsic purpose being the guiding force.

IBM’s intention to make profits by playing a strong role in solving social problems is a good example of how private enterprise can establish competitive advantage by contributing to society.

Images courtesy Wikimedia and NASA, via Wikimedia.