The U-turn on Mark Zuckerberg’s $45 billion gift

What is happening with Mark Zuckerberg’s Facebook shares? The new dad announced in a Facebook post that he would commit 99% of his Facebook shares to “advance human potential and promote equality”. The Facebook post ‘broke the internet’, with people all over the world heaping praise and thanks on Zuckerberg and his wife. The euphoria didn’t last long though. Critics began to question the ‘donation’, and media publications were asked about calling Zuckerberg’s announcement charity. So is it charity? Or is it another way for Zuckerberg to keep his wealth close? We sort through the hype and the hoopla for you.

Here are some criticisms of Zuckerberg’s big announcement

• His money will go to a business structure, not a charity: Many assumed that the money that would come from the sale of Facebook shares would go straight to charity – to fund schools, hospitals and other clear-cut charitable activities. Jesse Eisinger at ProPublica has pointed out that Zuckerberg has, in essence, “moved money from one pocket to another”. Zuckerberg has created a Limited Liability Company (LLC), a private limited company that he and his wife are wholly in charge of. The LLC will invest or write out cheques to other for-profit or non-profit entities as per their interests.

What the critics are saying: It’s not a traditional charity, and it seems like the Chan Zuckerberg Initiative is taking a less-trodden route to achieve their mission. As an LLC, the Chan Zuckerberg Initiative is not mandated to spend a minimum amount of their income on charitable activities. The reporting and transparency structures are different than those for a charitable organisation, giving more control to Zuckerberg and Chan.

• He’s done it for the tax benefit: The structure that Zuckerberg sets up protects him from paying the capital gains tax that he would have had to pay if he sold his Facebook stock directly in the market. Critics argue that not having to pay taxes on the $45 billion amount represents massive savings for Zuckerberg – and massive losses for the state. If the state had been able to collect that money, it would have been able to pay for more roads, pensions or public goods for its citizens. Zuckerberg has responded to these allegations, stating that the LLC will pay capital gains tax if it decides to sell the Facebook shares. On the other hand, if it donates the shares or sells it to raise money for a registered charity, they will receive related tax benefits.

Why the outrage:

Much of the hostility stems from the perception that Zuckerberg has chosen an LLC to avoid paying taxes to the government. (So much so that Zuckerberg has written a follow-up post explaining his decision). Americans are engaged in hotly contested debates about rising income inequality. Scientific American notes that in the US, CEOs out-earn janitors 354-to-1. Many American corporations now make more money than medium-sized countries, while paying very little in taxes to the American government. The perception seems to be that Zuckerberg is choosing this structure to avoid paying capital gain taxes.

• Blurred line between profit and non-profit: Zuckerberg’s new company is not restricted to writing cheques for charities. It can make investments in for-profit companies too. Critics have pointed out that non-profits face a ceiling on the amounts they can spend on political lobbying, while LLC’s do not. Jack A. Blum adds that non-profits are mandated to spend a percentage of their income each year on charitable activities, while LLCs don’t face such a restriction.

Why are people disturbed?

The new LLC is not forbidden from making a profit or investing in profit-making companies, something that people do not associate with charities. There is also speculation as to whether funding investments in for-profit companies represents charitable activities.

Our take

We obviously can’t comment on any of the questions about tax evasions as we have no evidence or special insight into Mark Zuckerberg’s mind. However, we do know that socially-focused initiatives can achieve their objectives through a number of routes. It’s not unusual for socially-focused initiatives to take a different form than the ones we have imagined. Grameen Bank is a poverty-reduction initiative in the form of a community development bank. Amul was set up to counter monopolistic trade practices in the milk trade, and chose a co-operative organisational structure to benefit their members. If either of them were structured as pure NGOs, it may have been difficult for them to achieve the scale that they have. Even out-and-out commercial inventions like Google have benefited the world by making knowledge more accessible. All these initiatives do not fit the conventional understanding of non-profits. Yet they arguably have provided more long-term benefits to members than simply setting up a school or a hospital. This is not to say that there is no need to build schools or hospitals. Rather, there are multiple approaches to solving a problem.

Secondly, NGOs are bound by restrictions that make it difficult for them to be financially sustainable. This includes

• Restrictions on business income
• Mandates to spend a certain portion of their income for the charitable purpose for which they were set up
• Restrictions on where they can invest their money

This is done to ensure that money spent by NGOs goes to help the needy and not in setting up profit-chasing businesses in the name of serving the poor. It is an understandable restriction. However, it means that NGOs frequently struggle for funds to keep their operations open. At the same time, it results in them living a hand-to-mouth existence, which is not conducive to generating long-term solutions for the problems they are trying to solve.

For example, Jonas Salk and his researchers worked on the polio vaccine for nearly a decade before they had a breakthrough. Incidentally, they were funded by a non-profit set up by the country’s President who also suffered from the disease, and national fundraising campaigns for the cause. Not all nonprofits have this luxury, and are forced to treat the symptoms of the problem and not the problem itself. In the long run, the money invested in finding a cure of polio has saved millions of lives across the world to date.  It is rare for an NGO to continute to receive assured income source if it is unable to demonstrate immediate results. 

Perhaps this is why billionaires like Gates and Zuckerberg are choosing a hybrid model to spend their philanthropic dollars. At the end of the day NGOs alone are not enough to solve the world’s biggest problems. It remains to be seen whether social enterprises or for-profit initiatives will succeed in this task. That seems to be the chance that Zuckerberg is taking.