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Friday, June 27, 2008

Bill Gates and Warren Buffett Discuss "Creative Capitalism"

via Creative Capitalism by Conor Clake on 6/26/08

This is the transcript of a discussion between Bill Gates and Warren Buffett about Bill’s concept of “creative capitalism.” The discussion, over lunch at the Gates residence in Medina, Washington, took place on May 15, 2008. Also at the table were Melinda Gates, Josh Daniel of the Gates Foundation, and me. I started by asking Warren what he thought of the whole idea. As you can see, he didn’t fall for that one.

--Michael Kinsley
Warren Buffet: I would rather have Bill, if he will, give me the main points.

Bill Gates: Well it’s not completely well defined. It’s a phrase that I used in a speech at Harvard a year ago, because I totally believe in markets as such powerful forces for drawing out innovation and creating things that are sustainable. And yet, you do get trapped in this situation where the markets serve where the dollars are, so you don’t get markets meeting the needs of the poorest. And so how do you bootstrap or support the needs of the poorest so markets are reaching out to them. I mean, when I view the last hundred years as an experiment in how good markets are, the answer is very, very clear and very strong. It’s one of those things that’s so clear people won’t even discuss it with you anymore. Like in this [Edward] Teller biography: he says, Look, if he didn’t believe in innovation, he would have been a communist. If the economy is a zero-sum situation, then you ought to try some crazy sharing thing. It’s only the innovation and pie-growing activity that made Teller feel comfortable with the capitalistic approach. And I think that that’s been validated.

You often hear people saying that companies should do something besides profit maximization. And it’s amazing how strong a message is hidden in words like “diversity” or the broad term “corporate social responsibility.” Warren and I were just at the Microsoft CEO Summit for the last couple days and it was amazing how many of the talks were about how a company needs to have core values of who they are and what they do as the thing that makes the employees feel they have a purpose and guides their action. And how that needs to be really at the center, even more so than the short-term profit metrics. Jack Welch was very good on that and Lee Scott [CEO of Wal-Mart] was very good on that, I think in a very sincere way. I think it’s more true all the time.

Bill George [of Harvard Business School] ran the leadership panel, and he was saying how the younger generation really wants to go to work with people who have a purpose. So what I’m saying is when people write down that purpose, when they write down their values, that an element of that should be: what can we do based on our skill set, our innovators, whatever unique capacities we have as a company--what can we be doing for the poorest 2 billion? And that can either be taking more risk in terms of trying to develop markets there, which is C.K. Prahalad-type stuff, or just doing things like the Merck donation that are not profit seeking and yet not giving up huge percentage of profit.

So somebody can read the words “creative capitalism” and say, “Okay, Bill Gates said that you should serve the poorest 2 billion and ignore profit.” That is not what I intend to say at all, but then I am being a bit ambiguous about how far you go in being willing to give up something. Am I saying one percent? Two percent? Three percent? Nobody who sets these dual roles is very good about being clear. I mean, what do they say you’re supposed to give up for corporate social responsibility. Well, they’re not willing to be numeric because they feel like the two goals, profit and social responsibility, aren’t totally at odds over time—or diversity, or whatever the value is.

I understand it best in terms of the big companies of the world: pharma, banks, technology companies, food companies. Buying from the poor world, supplying to the poor world, having scientists and innovators who come together to think about the poor world. It’s best defined for me there, and then I think, “Okay, how concrete is this?” I go back to this thing of: Okay, if all companies did as well as the best do, then it would be pretty dramatic in terms of the rate of improvement for the poorest. And a year from now I’ll know a lot more about this, because in my new time back at the Foundation I’ll meet with heads of pharma, heads of food companies, heads of…I’ll meet a lot of these companies and try and get a sense of, do they agree that in their hiring it would help them, do they agree that in their reputation and maybe seeking long-term markets it would help them and see how concrete a response is possible.

Warren: But as Bill was talking, it just occurred to me that if you don’t trust the government to do a lot of things very well—and business will never trust them to do that; rich people will never trust them to do that—and if, on the other hand, the honor system doesn’t work particularly well in terms of how many people behave (and this idea just occurred to me ten seconds ago so it will take a lot of refining): what if you had three percent or something like that of the corporate income tax totally devoted to a fund that would be administered by some representatives of corporate America to be used in intelligent ways for the long-term benefit of society, This group—who think they can run things way better than government—could tackle education, health, etc. or other activities in which government has a large role. And it would have this forced funding of three percent of corporate profits or some sum like that. Ace Greenberg used to insist that all the managing directors of Bear Stearns give four percent to charity, and in December he went around and talked to everyone who hadn’t yet given his four percent. And he told all the Jews that they had to give any shortfall at year end to Catholic Charities, and he told the Catholics they had to give it to the United Jewish Appeal. Well this would be a variation on that. Take three percent—pick a figure—of corporate income. That would be, perhaps, $30 billion a year (you would exempt small companies). If there are things to be done in society that the market system doesn’t naturally lead to, something like this would be a supplement to the invisible hand. It would be a second hand that would come down for society—administered in a business-like manner—and it might be interesting to see what a system like that might produce.

Bill: You might want to say that companies could include the cost of putting their best innovators onto the problems, and say that if you don’t do that, then you have to pay it out in cash and it goes into a pool for the businesses that do have the innovators and might want to devote four percent or five percent. When we go to a drug company and say, “Work on a malaria vaccine,” it’s completely unreasonable to expect them to fund it themselves. And so you do get this weird thing--I don’t know how much I’ve said this in speeches; I think I’ve said it privately more--where it’s better for a large drug company to say, “We don’t work on the diseases for the poor. But if we did, we’d give it away. And then you have these other drug companies that do work on diseases for the poor that face the fact of saying, “No, we at least want to charge our marginal cost for this thing, and because we put our best people on it we want some credit for having done this,” but they actually get discredit because they’re charging their marginal cost, where the other guy could pontificate and say, “Yeah, we don’t happen to have any, but boy we wouldn’t be like those bastards and charge for the thing.” So you get sort of adverse selection. It’s a sticky wicket. As soon as you get in it’s like, Oh no, I’m expected to do more because I’m doing something.

Warren: The market system is always going to take care of the medical needs of the rich . . . if a rich guy wants to take out a young gal, you’re going to sell him Viagra and be able to make money doing so. Basically, the market system will make that research worthwhile. But it won’t make research worthwhile for some disease that is indigenous to the poorest parts of the world and not present elsewhere.

Mike: Two of the biggest categories of creative capitalism seem to be, first, one way or another, a corporation gives away money or money equivalents like the time of its best employees, and second, corporations seeking out profit-making opportunities in poorer countries that they otherwise might not. Let me ask you about the second one. It’s sort of like the famous joke about the economist who sees the ten-dollar bill on the ground and says it can’t be there, someone would have picked it up. Why does it require creative capitalism to…I mean, if there is great opportunity there, why aren’t people doing it already?

Warren: Market opportunities will be filled. I think the present system works pretty well in terms of real market opportunities. Now there are a lot of people who would like things to be market opportunities that aren’t market opportunities. But I don’t worry very much about real market opportunities not getting filled.

Bill: You definitely want to encourage people to go into countries where it would be normally riskier and they might not choose to go. A country like Vietnam is improving its situation without much help from creative capitalism. They’ve gotten governance basically right, the education thing is right, they’re getting population growth at a level where they can really feed and employ their people. It’s a spectacular thing. In an earlier question we talked about which are the most important elements. Government plus normal capitalism--really good government plus normal capitalism. If you can have that, God bless you, that is such a fantastic thing. It works very well.

But, when you get this problem of these diseases-- it’s almost too bad, this sounds like an awful thing to say--but there are diseases that are mostly in poor countries. When that’s not the case you have trickle down, which eventually will work for the poorest, because drugs usually have a high cost of development that gets recovered in the rich world and then as they go off patent they’re sold for marginal cost and everybody benefits. And so the fact that malaria was eliminated in the United States and so they don’t need a malaria vaccine, it’s a tiny bit of a tragedy, because you don’t have all of these brilliant minds just seeing that and acting on it and those economic dollars. So I do think we have some real traps where you need creative capitalism. Like getting micronutrients to the poor, getting these drug discovery things to get done. Trying to use the cell phone and network in a different way. The rich world can fall into a way of doing something that works for them that doesn’t work for the poor world and then they go off on very different paths. Ambani, the Reliance guy, [conor, find link pls]who’s very capitalistic, I mean he’s going to do some philanthropy, but he’s mostly in business. He’s chosen to go into the retail business in India. He’s in the energy business mostly. He split things up with his brother, but he kept the energy business. I said, “Why are you doing that?” Well, he’s kind of excited about it, but that would do a lot of social good. He was explaining how they use technology so that 50 million farmers who didn’t used to be able to sell their stuff would be able to sell their stuff. Anyway, so there are great things that capitalists are willing to take more risks in these countries and feel they get some reputational benefit for taking risks in these countries, or they think about long-term growth. So that boundary of how much are you pushing them beyond their normal comfort level to take a risk that will this help them to hire better employees, or will this eventually become economic? The creativity part is partly biasing them towards taking those big risks.

Warren: The market also gets distorted where you feel you’re going to get screwed after going in to a country. You’re going to set a higher threshold on expected returns, if you think there’s a fair chance they’re going to expropriate your assets. And, if there is no rule of law at all, you may skip the country regardless of possible returns.

Mike: But that’s rational.

Warren: Yeah, absolutely rational. Now the counterbalance of that is to have a federal Ex-Im bank or something like that that says if you go to, say, Indonesia and they take your assets away from you, well at least they guarantee you will get your cost back. But government has a role to play in that. Otherwise it is perfectly rational for me to say I’m not going to go back to Indonesia again because we got screwed. That will always be the case with some countries, although I think it’s way less of a deterrent now than it was 25 years ago. Nevertheless, expropriation risk—including confiscating taxes that might later be imposed—will still deter people bringing goods and services to people in some areas of the world.

Mike: When you talk about the comfort level, Bill, is that...can people or sometimes companies irrationally seek comfort and avoid risk? And if it’s not irrational, why should you force people to do it?

Bill: Well rationality only goes so far. If your young employees are saying to you, “Hey, should we be trying to develop the market in Africa?” Rationality might say to you, “Gosh, we don’t pay much attention to that, why bother?” There’s a lot of latitude in terms of what’s rational. If you feel like getting involved in that, if it has this positive benefit, then you’ll put more time into the specific strategy that is rational to going after that opportunity and maybe coming up with something that in the long term is very rational.

There are multiple rational paths that companies have to go down. If you said to a company, “Hey your diversity policy made you do irrational things versus what you would have done without a diversity policy,” they will say, “oh no, it just opened our eyes to better rationality.” And some of them will be telling the truth. I think a lot of them will be telling the truth. Some will just--of course they don’t really know. You don’t get to live path A and path B and then subtract and say, “Okay, the one that is bigger is the rational one and the other one is kind of the stupid one.” So it is a bit like diversity to say that, hey, if you’re a food company with geniuses about putting vitamins into foods that putting some portion of those people on to these needs of the poor people, you’re really being pressured to do that and find the smartest way with all your IQ experience to make that work for you and to the degree that it’s money losing, do it in a way that the visibility and reputational gain pays you back from the other customer base.

Warren: I would say that it may well be at Microsoft that it makes some difference in terms of whom they hire. But I think if you took Kraft versus Kellogg versus General Mills—and General Mills happens to be in Minneapolis where they have that five percent corporate donation program—I don’t think it has any real effect on the quality of who applies for jobs at the three companies. You take GEICO. If GEICO has a policy of being green, or whatever, when we are recruiting, I don’t think it makes much difference to prospective employees.

Mike: So let’s talk about situations where creative capitalism is frankly going to cost you something and it’s like you’re reducing the return to shareholders. And question one is why do corporate managers have the right to do that?

Warren: I don’t think they do. We (Berkshire Hathaway) had that shareholder designated contribution program for 25 years. Basically, I don’t feel I’ve got the right to give away shareholders’ money, though I feel our shareholders should have the right to designate their share of profits to their own charitable priorities. I mean I may believe in women’s reproductive rights or something like that and if I want to give all my personal money to that, that’s fine. But I don’t think other shareholders should have to support my preferences. However, I think it would be nice if we had a mechanism, like we once did, whereby the people who favored adoption would be able to devote their proportional share of Berkshire’s charitable funds to that purpose.

Mike: I thought you had a program like that.

Warren: We did for twenty or twenty-five years, but we had people who weren’t our employees, but who work with us, who were getting so much heat on them that they were losing their source of employment and earnings. I just wasn’t willing to fight them on that. When the government bureaucrats allocate the taxpayers’ money, all the rich guys get mad about it. But when the rich guys are allocating their shareholders’ money, they seem to think that God gave them that right.

Bill: Let me take a case that’s really clear-cut, which is the Microsoft case. We need to have great relationships with governments all over the world. And because we make a product whose marginal cost of production is very low--software--and because information empowerment is so directly what we’re about, it’s not a stretch in any way--the idea that we go into over 100 countries and do these things where we donate massive amounts of software and we even give cash gifts and we train teachers and we make sure we get visibility for that and we make sure when we hire employees they know about that. When we’re competing for government contracts we remind people we’re a good citizen in that country. I can’t do the math for you in some hyper-rational way. I suppose you could go overboard on it, but versus not doing that, Microsoft is absolutely way better off.

Now, the thing we’ve done that I don’t know if we’ll get credit for it--but I love it and I think we probably will--is we have the lab in India specialize on looking out for the poorest. And it was very interesting, because when they came in to present to me, they had a few slides up front that said…they call it bottom of the pyramid, bottom two billion. They had a few slides up front that said PCs are too expensive, electricity is too hard, we’re going to show you something here where Microsoft software actually plays a modest role. And it’s this thing where they use DVDs. It’s really cool. To help teachers and to help farmers. But literally it’s a TV set and a portable DVD player where the best practices, like American Idol, you get the local farmers together, they compete, they video the best one and they create a social event where they take that out and play that DVD. It didn’t use a lot of Microsoft software, but so what. It’s a very clever idea. They’re going to spin off, the people are so committed they’re going to go do this full time and The Foundation is looking at how we can support them as they plan to scale this thing up. So it’s a minor part. If you did the math, I think there were 30 people in the lab who were broadly working on this stuff in a 60,000-person company. Has that got some direct payoff? I bet it does, because there’s just so much leverage in something like that. So I think for the big companies that are in these world markets, there’s a lot.

Take the drug companies. The degree to which government policy affects how they charge for their product, it’s a lot like the Microsoft situation. They want to have good relationships with governments. They want governments to understand a little bit about the position that they’re in. Getting that hearing, they would be the first to say that on AIDS, they made a mistake. That drawing the line that, hey, you should always pay for drugs and not putting the footnote in about the AIDS emergency and how things were priced on that, that was just a mistake. The general principle okay, but they need the big footnote about tiered pricing, health emergencies. It’s a complicated footnote, but they blew it. And now they’re kind of making up for that, some better than others.

Warren: If I’m chairman of Exxon Mobil, though, and I think that Nigeria is a particularly attractive oil province to go to work in, do I give $10 million to the favorite charity of the president of Nigeria, or do I poll the lower class of Nigeria to see what they’d really like done for them and spend the $10 million there? I mean, if you’re really following market economics you do want people to think favorably of you, but different companies may want different people feeling favorably about them, and all this may have very little to do with what society would like if you had a social equation that you were weighing. On a strictly market test, it may be better to have a dictator or his wife think well of you than take an action that benefits his millions of subjects.

Mike: Isn’t there a sort of a catch-22 logic at work where you say that spending this money is justified for the shareholders because the good will pays off in various ways, helps you hire better people, gets you into Nigeria…

Warren: Or keeps you out of trouble.

Mike: Yes. But then if it really does pay off, why do you still have bragging rights? If what you’re buying is bragging rights that you do good, and those have value, therefore it’s justifying in terms of your imposition on the shareholders--well in that case you don’t deserve the bragging rights.

Bill: Yes you do, because you’ve pushed the world in the right direction. There is such a thing as a win/win in this world. If you figure out how to give good customer service, you are allowed to brag about how you have great customer service. If you figured out how to make governments love you by helping the poor people in that country, you get both the benefit of the government loving you and you get to say you helped the poor in that country.

Warren: As long as you don’t say what you’re doing is to get bragging rights?

Bill: No, no. Microsoft is very honest to saying that it’s not purely our doing . Partners and Learning, which is the school donation thing. That’s not purely… we don’t go to the world news and say, “Oh we’re just suffering so much this was so hard.” Ask Merck on the medicine donation thing, the Mectizan. Their employees are very enthusiastic about that. They give update videos from the employees when they get together and all that kind of thing.

The world is more like this. Kids do really want to associate themselves in their fulltime work activity with something beyond just how profitable the institution they’re involved in is. Now, maybe that’s a very elite statement, maybe that’s more an upper-tier, particular group of people, but if you take the big global companies, that’s the hiring pool that they care the most about. I hope I’m right about that, because that gives the win/win element to the part of this that the economics don’t ever develop from.

Warren: The people at Wal-Mart would rather work for an admired company than a company where they’re criticized every day. I don’t think they care that much about the specific policies that lead to the criticism or admiration, but there’s no question you feel better about going to work for a company that’s admired or your kids feel better because they hear different things at school. But at Wal-Mart I think most employees care about the policies that will directly affect them. I’m not sure how much they really care about the other issues, except to the extent they lead to this secondary aspect.

With our shareholder designation plan we had reverse publicity. In the end some people boycotted See’s Candy because of what our shareholders were giving to, even though other shareholders were giving to things they agreed with. They picked out the things they didn’t like rather than the things they did like in terms of our published activities.

Bill: They didn’t even give you the net benefit of the…

Warren: No. We regularly pointed out that it was totally the shareholders making the decision. We had lots of money going to Catholic schools and all that. One guy wrote me and said I don’t care if you give a billion dollars to pro-life organizations and a dollar to a pro-choice organization, he says I’m still boycotting you. People feel very strongly sometimes, often in inverse relationship to the logic of their argument.

Mike: One thing you’re proud of at the Gates Foundation is the way you focus and the way you make very rational, businesslike, and to the extent you can, testable decisions about where you devote your resources. What confidence do you have that this much more amorphous process you’re describing here where corporations want to have good relations with the government of Peru or want their employees in India to feel good and so on will have anything like that kind of discipline in where the resources go?

Bill: Well, discipline is always based on feedback systems, economic or otherwise, and so corporations are very, as Warren was saying, very influenced by reputational feedback. Almost slavishly so. I mean there are some things about how you do corporate structure that just gets done without even that much evaluation because somebody who does a point system on governance has chosen that to get these points we have to do such and such. And this thing would be most healthy if a body of expertise grew up that was probably industry specific that was looking say at the food companies, the drug companies, the banking companies and did on a say yearly basis an analysis of this is what this company did that is in this creative capitalism category and here’s the impact that we think that’s going to have. And that type of feedback system I think is a necessary element of keeping the score in some fair way and making sure that when these resources are used brilliantly, that the best practices are spread and when they’re not there isn’t too much credit. I’ll be the first to admit that it’s very easy because the normal person won’t be able to test the statement. It’s very easy to make statements about this that sound good and only by taking a lot of time to dig in to it do you find out that it had no impact at all, it wasn’t that much money, it was something that we were going to do anyway. Otherwise, there’s a lot of room for fluffery in this space and so you’ve got to bring in expertise and that will probably take a while to develop.

Mike: In Washington, I was always struck by the fact that there would be these lavish parties to celebrate, say, Exxon-Mobile’s contribution to Masterpiece Theater. And then you’d look it up and it turned out well they spent $3 bragging about how wonderful they were for every dollar they spent being wonderful.

Warren: I’ve been on the board of a number of places where I’ve watched the charitable dynamics. One was the Urban Institute. The truth is I could walk in to the CEO of any company and get $50,000 or $100,000 for the Urban Institute if Berkshire owned their stock or if I was on the board or Berkshire was a huge customer. The whole thing was based on figuring out who was connected to whom and one time I brought it up. . I said, “Do you ever list all the wonderful things the Urban Institute is doing and then ask the CEO for his own personal contribution?” They said, “Don’t do that! Just ask for the corporate money.” Having been on a lot of boards, a number of the boards even let the directors make certain charitable contributions and matching contributions all that sort of thing. I think Bill, however, could actually go to Pfizer or some other company and have some real impact. He’s personally contributing substantial sums, which is impressive, he’s calling personally, and he knows the subject. He could have some impact. Very few people can.

Bill: I do draw a distinction between the company drawing on its natural expertise like the drug company doing a drug or a Coke company with its distribution system or Nestle buying more food from poor farmers or helping put micronutrients in that don’t make the food taste bad. I draw a big distinction between that and writing a check. If ExxonMobil employees actually did the Masterpiece Theater thing or some brilliant thing about crude oil because that’s kind of a stretch, maybe they’re drawing on something unique there, but they’re more likely to help out in that they...and they do some of this. They have employee scenarios where there is very high disease and so in terms of trialing drugs they’re good. In terms of reporting oil revenue--anyway, I’m not really an expert on that, but they…

Warren: Well they went along with host countries. I mean it would be crazy if they didn’t. Getting along could mean doing some good things or paying off people or a whole lot of things. But they need to get along with the host country.

Bill: The Foreign Corrupt Practices Act and to the degree other rich countries have adopted that, that really has raised the level of honesty in business worldwide.

Warren: That is for sure.

Mike: There are people who will tell you it has destroyed the United States’ ability to compete.

Warren: Compete in certain areas. There’s no question about that.

Bill: I wonder what industries and how big that is? I know the worldwide benefit is pretty large, so the U.S. loss would have to be pretty big before I’d start to still think it was any type of mistake.

Mike: Well, suppose I was a shareholder of Microsoft or even suppose I wasn’t, but I came to you and said, “Bill, rather than trying to come up with all sorts of ways Microsoft can make the world a better place, some of which--maybe even most of which--aren’t going to help the bottom line, I would much rather you do everything you can do to make Microsoft profitable and then take the money that you made and spend it directly on what you have figured out to be the most efficient way to make the world a better place.”

Bill: I think that would be a mistake because what we get in countries around the world where our employees are volunteering to train teachers in these schools, where they are taking some of the time that we pay them for to train teachers in these schools, and where we’re making cash donations to training--the leverage we get by donating free software, and the leverage we get by having seen countries that do this well--and there are a lot of countries that are very open minded that say, “Hey, show us how to do this well.” And where we can have them go visit the other country and see it. They are really interested in what those pitfalls are going to be and, you know, the world’s not just about money. It’s about expertise. The developing world has a huge shortage of expertise and to that degree Microsoft, either from its rich world employees or spreading best practices from one developing country to the next, has a huge impact, though it’s hard to measure. The amount of money we…say we cancelled all this stuff, it wouldn’t be more than 2 to 3 percent of what we do. It might get about 3 percent because we put a lot of employees’ time into it. In some of the poorer countries it would be 20 percent of what Microsoft does, but not that high.

Mike: And you feel you’ve got a 20 percent payoff even there?

Bill: Well, in those countries it’s when we’re first establishing our business and our business is quite small, and the early relationship with the government is the main thing we’re doing when we go into a country that was so marginal. We weren’t in there before and now we’re in there. Take Indonesia where I just was…we’re down to where maybe 10 percent of what we do is not direct profit seeking but helping education, helping with community centers. It’s about 10 percent. And that’s not counting the value of the donated software. If you count the value of the donated software you can get some big number, but that’s a fanciful number in the sense that it’s not business forgone. There was not a path where those dollars came into our sales number.

Melinda Gates: I keep thinking about the refugee situation where you sent people in to catalogue the refugees. I mean that took expertise.

Bill: Right. This is the thing where when…if you get trained personnel who can go into refugee crises who own a laptop computer and who can just type in who they’re seeing and then the wireless network collects that from all the difference places and you have everybody who’s looking for somebody and everybody who has somebody and they actually print out these little cards that the person could carry around, but they had that database. That’s a very straightforward example: the expertise to get where there’s no real network, but the wireless thing works and then you can train the people on the software before the crisis happens. And everybody likes to give money when the crisis happens; if you give money before to buy the portable computer, set up the software, train the people then it’s more leveraged actually and that’s the kind of thing a company like Microsoft could do because it’s not a huge thing for us.

Our employees got very enthusiastic about it. We showed the video, people volunteered, got involved, even some people left and went and worked full time on that thing. So it’s not because software is magic and corporations have a lot of innovation power. If you don’t, you know, I have this strong belief that innovation is so key to improving the conditions in these poor countries. And they don’t--in terms of their universities, long-term research, people understanding the latest science and how that maps to the problems they have. Talk about a systemic underinvestment where the public good just doesn’t get created. It’s gigantic.

Warren: I think corporations, though, much like many foundations, will focus locally. That’s the natural tendency. If you take that Minneapolis group, you know, it started many decades ago and you really pledged, if you were a major corporation, that you were going to spend a significant portion of profits on philanthropy. Target is five percent, I think.

Bill: Five percent?

Warren: Yeah, five percent.

Bill: Five percent of their profits goes to…

Warren: Yeah.

Bill: That’s amazing.

Warren: They have General Mills, Pillsbury, Cargill, 3M . . . all of these guys . . . everybody did it. I mean you were an outcast if your business was in Minneapolis and you didn’t . . . but my guess is overwhelmingly most of the money went to Minneapolis or Minnesota related things. You weren’t expected to take a world view. Now Target has probably broadened it out as they have become national.

But the interesting thing about our shareholder contribution plan was that nobody was personally soliciting anybody for any cause. There wasn’t anybody putting pressure on, or personal solicitation. Churches were by far the biggest beneficiary of it and schools were second . . . and, of course, corporations normally never give to churches. We had hundreds and hundreds and hundreds of people designating churches.

Bill: To be fair at the operating level to the degree that there have been, you know, community charity type things that are appropriate for that business and are driven not by specific managerial interest but really by business interest, you allow the operating business to continue those things. So when you look at the overall Berkshire picture you really have to go down into those operating businesses.

Warren: We have companies for sure that give more than two percent and then we have others I never look at . . . I’ve never named a charity or said the amount subsidiaries should give. I just tell managers don’t do personal stuff with company money.

Bill: So take Iscar [an Israel-based metalworking company] that Warren just put $4 billion into. They have a policy, and I don’t know enough of the specifics. I’m excited to go see it, where they’re really big on putting their plants in tough places and employing the minorities, which are the Israeli Arabs, as much as they can.

Warren: 20 percent Arab.

Bill: And that is not purely driven by a bottom line thing. It’s a societal contribution, I believe, that they make by the way they do things.

Mike: There’s a third category of creative capitalism, which is like the Red Campaign. Basically, consumers will apparently pay a premium for a product if they know that part of it is going to go to charity. I would ask Warren: isn’t that a little irrational?

Warren: Yeah. I don’t think it works that well. I mean American Express didn’t want to follow through much on it, but I think if you have a specific cause for a short time . . . there’s a local tornado in Omaha or a tsunami far away—it’s both humane and politically correct to respond. I don’t think it’s something that sustains itself over time. There are a few people who will stay motivated on it. But I don’t think that if we announced at GEICO, you know, two percent of your premiums were going to help people around the world, only a few would want to pay an extra two percent. The rest would say reduce my premium and give it to me.

Bill: I agree with that in terms of car insurance. When people buy clothing, you know, my daughter’s not saying, you know, “Do these Juicy sweatpants wear out in N years and have a certain stiffness,” or things like that. She’s associating herself to the degree we fund her to do so with Juicy. And so the Red question, which I admit is out, but I think it’s a great experiment and I’m somewhat optimistic is can you create a brand association for consumers in the U.S. if there are some products like their credit card, their clothing, their cell phone? There are things and you have to be very creative in coming up with new things and keeping those fresh. Is there a brand association with red products that you feel proud that you’ve done that and it’s kind of a cool thing? There are kind of neat new products. Whether that’s just a short-term thing because it has worked short term or something that can really be sustained and get a broad group of products in. That’s where branding people are needed to help us achieve and I think and I hope the answer is yes. I’m not saying that all products in the economy should all go off and have some, you know, bleeding heart 2 percent payoff thing. I’m not saying that at all.

Even if it is grandly successful this will be a tiny part of the economy. These things do add up. You save lives now a days for $200 a year buying AIDS drugs and it’s a pretty powerful message. If we didn’t have Bono to help promote it, you know, we really wouldn’t have had the short-term phenomenon that we’ve had. You can talk to Gap or Hallmark about how they feel about their experience with it. So it’s not going to generate billions of dollars. I think whatever money it raises it also is a nice vehicle for us to raise awareness of these causes and ideally activate people to either volunteer or vote in a way that is beneficial to these causes as well.

Warren: There are 20 other variables, but Gap’s in-store sales are falling month-by-month. There are a lot of other variables. Believe me they were falling before, but it is . . . I think it’s tough to build a sustainable thing. I’m not saying it’s impossible, but I don’t yet see the evidence.

Mike: Is it ever going to work on you as a consumer?

Warren: Never has.

Bill: Well, Warren’s not much of a consumer.

Warren: In fact, I’m not much of a consumer at all.

Bill: Think about how you’re brand conscious in something you buy. When you buy golf balls what do you think? You buy brand.

Warren: You buy a brand. You’re buying what you hope is distance. You do.

Michael: So how much distance would you give up for part of the cost of your golf balls to go to AIDS?

Warren: The difference is a matter of a yard or two. I’m not giving up anything important.

Bill: If brands…brands are about an association and it’s not irrational that there could be a brand that was about being associated with helping with AIDS. It’s a new pioneering thing that…it’s done pretty well so far.

Mike: I just want to take another crack at something. Suppose you were running the world. Would there be a place for creative capitalism like this in it? Or would it be much more rational? Would you say, “Look, corporations should be efficient and produce products and then we should decide what we wish to achieve as a society and we all pay taxes and do it.”

Warren: I would have my own tax system, but the answer is I think I would go the second route.

Bill: I think there are going to be corporations where expertise builds up to solve problems that is not built up any other place. And your hypothetical is a little strange because what we’re faced with is a world with vast disparities in wealth that have to do with what country you’re born into and you wouldn’t have that if you had one person running the world and so, you know, the degree to which a little bit of innovation can make a huge, huge difference whether it’s an LED flashlight or something you can roll to move the water that you used to have to carry.

Some of these innovations--when you see them you say, “Oh, well, obviously that rationally should have happened,” but it only happened because somebody cared. Now you could say in the grand sweep of time capitalistic economics would have come up with that. Well, there’s a lot of suffering between now and eventually that this thing can deal with.

The brilliance in innovations inside universities--we haven’t talked about universities here because I haven’t thought about that as much, although even some of them are starting to get involved. Getting them to take their innovation power, thinking power, awareness raising power, into these things is another part thing that I think is important and I hit a tiny bit on that in the Harvard speech, but we have all this expertise. You need to apply it. Drugs are just such a clear, clear case. The government doesn’t know how to make drugs. They don’t know how to trial drugs. There’s no government in the world that’s in the business of doing that. So you’ve gotta send the signals…now I admit that you could do it if you had a single world government. You could do it just by giving money to the poor and then letting the market speak out. I think you could design a utopian system that would do it that way and then you wouldn’t have to rely on--you could have robots working at the company. Whereas here I’m actually explaining the fact you have people who care about humans working at the company.

Warren: But I think the most realistic model actually can be the Gates Foundation. If you’re really looking for ways to take huge amounts of resources over time, and they are going to be huge aggregations of resources, and you show the world that something is a better system than government and will work better and can attack things that government can’t and so on; and that will use resources efficiently. I think people will look for that--not 100 percent of the people, not maybe 50 percent of the people, but a lot of people will. But I think it could be a demonstration project like nothing else the world has ever seen.

Michael: The retiring CEO of the Gates Foundation--she’s very excited about the idea of a middle institution that’s not non-profit and it’s not for-profit. It’s a low-profit, and I think [Grameen Bank founder] Muhammad Yunus has suggested this and basically it runs like a corporation except all the money is put back in.

Bill: Well, there are such things, you know, there are mutual operations that are like that, you know, the recreational co-op, which is pretty sizeable now a days…What percentage of the hospitals in the U.S. are under that type of structure--50 percent, 60 percent?

Warren: If I owned 100 percent of Berkshire I could have set it up that way. But I think the model of intelligent, private philanthropy will look superior to governmental spending in many areas. I don’t think there will be a shortage of funds over time and I think there will be a lot of people who will make a lot of money who don’t now have the faintest damn idea about how to best funnel that money back to society, but will, nevertheless, feel like they want to funnel that money back to society. I think intelligent private philanthropy has a huge potential.

Bill: Yeah. I would say two things about that. One is there will be an effort with more to spread the word about how much fun it is to do philanthropy--either the way I’m doing it, where you get deeply involved, or the way Warren’s doing it, where you look and you pick somebody who you’re excited about their approach and you back them to go do it. So I’m going to meet some percentage of the very rich people in a quiet way and encourage them. It will be all their credit if they choose to do it, but I’ll say that (a) philanthropy is good, and (b) the hardest part of philanthropy, which is getting to poor countries because learning how to do that, knowing it’s effective, dealing with some of the challenges there, you know, showing them where that works and in a few cases maybe they will want to partner with us. I think upping that goes along with upping the corporate part, which is the creative capitalism, and goes along with upping the academic attention to the problems of the poorest.

Things like grand challenges are another kind of innovative thing here where we might dial a grand challenge in micronutrition and it might be some guy at Nestle in that food lab who sees that thing and says he can solve it and he needs a little bit of forbearance from his managers to take, you know, five or 10 people and write it up and come to us and say they’ll transfer that technology or something. It doesn’t take some big diversion of a profit.

Also, to the degree The Gates Foundation works, we are engaged in these things where companies like GlaxoSmithKline--even though we’re funding a lot of the work--they’re putting some of their top innovators on the malaria vaccine. You’ll never figure out the numbers, but there are some opportunity costs where those people could have worked on something else. Now if one or two of them were people who said they would have retired if they couldn’t work on this or figuring out how fungible that resource really would have been for them and what it would have done. It would be pretty hard to beat America on that, but they are really giving up opportunity costs to do these things. If we work it will be partly because people like GSK are going along with us or [India’s] ICICI Bank are going, or Nestle are going along. And that list, you know, a year from now will be a lot longer.

Warren: Over the years, by his letter, Bill will be talking to more rich philanthropists or potential philanthropists, you know, than anybody ever has in the world. I mean Carnegie is still talking 100 years later or whatever it may be since writing The Gospel of Wealth. Bill’s model can have a huge potential and it can have a huge potential with smart people who may think of variations on it. He’s in a unique position to talk to the world on it and the world wants to hear what he has to say. It’s a great opportunity.

Bill: Just to be clear what Warren’s referring to: I don’t know if you’ve heard, but I’m going to do something that in the world of philanthropy that is much like what Warren’s annual letter is in the world of business. And the target is that the first one of those will come out this January.

I do think talking with rich people globally, they will be interested. Not necessarily that they will do anything, but for me to say, “Oh, wow, this went well, this went poorly. Damn these governments who can’t do this and that.”

Mike: You get the letter if you could give away money and you don’t actually have to be giving it away yet?

Bill: The letter will be on the Internet. We’ll promote it as, “Hey, maybe you’d be interested in reading this thing.” And there will be a number of constituencies, but potential givers are a big part of it. Somebody who works at a UN agency I bet, you know, some of them will read it. Some people in poor world governments will read it. Some people in the drug industry, who knows.

Warren: They will all read it every time.

Bill: I’m going to get the jokes from Warren and so that is--

Melinda: The clean ones.

Bill: No Mae West.

Warren: It’s got huge potential, because you’re actually doing it. I mean it has so much more impact than some academic writing about it or something. Everything goes through your mind and they love it. They want to know that. They get a chance to sit down with Bill Gates and talk about philanthropy or listen about it anyway. They can see what you’ve done and they can say all kinds of things. Really, look at Carnegie’s thing. I mean it isn’t that amazing what he wrote or anything like that, but it influences people a century later. I mean this has got 100 times the potential.

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