Google searches for social returns

Market domination can cause a backlash if you’re not careful. Before Bill Gates formed the Bill and Melinda Gates Foundation and then teamed up with Warren Buffett, many consumers thought of him as the ruler of an Evil Empire. Hackers made it their goal in life to bring Microsoft (Nasdaq: MSFT) down. Ted Turner and Rupert Murdoch have long worn the same crown of thorns in the media world.

Having learned from recent history, Google (Nasdaq: GOOG) founders Sergey Brin and Larry Page hopped on the philanthropy train before accusations of arrogance could catch up with their legendary success and bold self-promotion campaigns. Enter Google.org, a newly created Google subsidiary that funnels money into the nonprofit Google Foundation, other nonprofit efforts, and — here’s where it gets tricky — forprofit startups and technologies aimed at battling pollution and global warming.

The purely nonprofit Google Foundation was founded early in the company’s history, before it went public. Potential investors were told before the IPO that the company would set aside 1 percent of its profits for philanthropic efforts. Now that money will go to Google.org, which will in turn disperse it. It has already handed over $90 million to the Google Foundation, and Google’s board has approved the dispersal of $175 million per year to Google.org, which plans to spend its $1 billion endowment over the next 20 years. If this for-profit-nonprofit hybrid sounds unusual, it is — although Google is not actually the first to do it. The Omidyar Network, established in 2004 by eBay (Nasdaq: EBAY) founder Pierre Omidyar, has that distinction.

Committed to “fostering individual selfempowerment on a global scale,” according to its Web site, the network funds both nonprofit and for-profit entities that promote equal access to information, tools and opportunities; rich connections around shared interests; and a sense of ownership for participants.

Still, Google.org is the first such organization to remain so closely tied to its corporate birthplace. It’s not called the Brin and Page Network; it’s Google.org. This is where some skeptics cite potential pitfalls.

Robbie Kellman Baxter, a strategy consultant with Peninsula Strategies of Menlo Park, Calif., has worked with companies such as Netflix (Nasdaq: NFLX), Yahoo! (Nasdaq: YHOO) and Oracle (Nasdaq: ORCL). She notes that Google.org’s biggest potential problem lies with the Google shareholders, who must be completely aligned with the goals of the company and have a clear understanding of what Google.org will be doing.

Baxter draws an analogy between Google.org’s strategy and that of a store owner who decides to start giving discounts to certain people who couldn’t otherwise afford the store’s products. “That’s effectively taking away profits from my investor,” she says. “I’m making the decision for them, which is problematic.”

Google.org Executive Director Larry Brilliant has stated that profits from Google.org will stay within Google.org, and that money will not flow back and forth between Google Inc. and his organization. But, while it’s easy for shareholders to support charitable and long-term investments in times of financial prosperity, what happens when the economy dips or the health of the company falters?

As of yet, shareholders can’t really complain. Google.org has already brought good publicity to the company, all but erasing the smudge that the Chinese censorship stories left on its global reputation. And some of the technologies and companies it’s talking about investing in — one project has Google and auto industry scientists developing a hybrid engine that could get over 100 miles to the gallon — could be hugely profitable in the long term.

In a recent interview with The New York Times, Dr. Brilliant was careful not to delve into any specific investments, but he said that while he hoped ventures like the aforementioned engine would turn a profit, “if they didn’t, we wouldn’t care. We’re not doing it for the profit. And if we didn’t get our capital back, so what? The emphasis is on social returns, not economic returns.”

It’s a bold statement typical of Google and of the recently appointed Dr. Brilliant, and it has several implications both for shareholders and companies in which the organization might invest. Values-driven companies that have worked hard to establish the potential for doing well by doing good might feel that such a statement weakens their argument, that it doesn’t prepare social or environmental entrepreneurs for the real-world need to be self-sustaining.

Baxter points out that while the organization’s for-profit status might be introducing the concept of profitability to the nonprofits it works with, statements like Dr. Brilliant’s may be setting forth conflicting strategies for the for-profit companies.

Richard Cohen, executive director of the National Committee for Responsive Philanthropy, was quoted recently in Tax Notes Today objecting to Dr. Brilliant’s “erroneous perception of nonprofits that they somehow always wallow in red ink.”

While the stereotype holds true with some nonprofits, William Brent, who founded and ran two nonprofits before joining Weber Shandwick as a vice president and head of its Cleantech group, is quick to point out that in the past five years, many wealthy businesspeople have moved into the nonprofit space, found it extremely inefficient, and sought to infuse the sector with entrepreneurial character and even profitability.

Still, he says, “I would argue that there are inherently many functions performed by nonprofits that never will be profitable and never should be. In the case of Google.org, they seem to be realistic about this fact.”

But if the emphasis is solely on social returns, why bother with for-profit status? Google.org’s reasons include the flexibility to start companies, work with venture capitalists, invest in companies, garner further investments from other funds for the companies it starts, use profits to finance further endeavors, and lobby Congress.

Moreover, as William Brent points out, all this talk of purely social returns and “compassionate capitalism” is just that — talk.

“The markets have no compassion,” he says. “They are driven by profit and economic efficiency, with a very short-term view — Q1, Q2, Q3, Q4. If the stock market and its listed companies make decisions that benefit society or the environment, they do so because it makes economic sense, or consumer sentiment has shifted and created a demand for such decisions.”

Although it is possible that without financial accountability the companies Google.org funds will be inefficient, companies associated with the organization will have access to a number of tech gurus, accomplished businesspeople, premium legal counsel and high-level contacts in several industries around the world. And broadening the goal to include social and environmental returns leaves entrepreneurs enough room for long-term vision. Robbie Baxter describes Google.org as more of a think tank or a venture fund with a really long timeline.

“If I’m a public company,” she says, “I have to get a return every quarter, which is stressful and stupid because there are a lot of instances when, if we took a loss this quarter, we could invest in something that will pay off big time down the road. But because we have to hit this quarter’s number, we don’t have room for the home run. Giving room for that is the real value that Google.org is bringing to these companies and projects.”

Rusty Rueff, CEO of Snocap Inc. and author of “Talent Force: A New Manifesto for the Human Side of Business,” points out another possible result of Google.org’s “social returns first” approach: attracting quality employees to Google, Google.org and the companies and organizations benefiting from the latter’s investments.

“People want to work for a purpose, and companies who expand the purpose will win the best people and higher level of commitment,” Rueff says. “Sure there are risks that not everyone will agree with the causes or the size of the investments, etc., but, at the end of the day, employees already know that companies are not democracies, and choices like funding philanthropy that I might not like is still better than not doing anything at all.”

Does Google.org spell change in the nonprofit world? Will other corporations launch their own for-profit-nonprofit hybrids, or is it something only Google could pull off?

“Having a for-profit arm as part of your philanthropic portfolio makes a lot of sense,” says Suzanne DiBianca, executive director of the Salesforce.com Foundation and an advisor to Google in the formation of its 1 percent philanthropic strategy. “It’s similar to what an individual investor would do. They might invest in mutual funds and bonds, but then also in a Calvert fund. And they might also give to charities where they don’t expect to see a profit.”

But few companies have the level of profitability or the shareholders and executives with the power to make such a bold move. It is perhaps more likely that other companies will take bits and pieces from Google.org’s strategy and use it as their own.

“They’re taking a stand, using their name, money and charisma to do something that has a real potential impact,” Baxter says. “And because they’re larger and have more profits, they may inspire other companies.”

And while the stated intention of Google.org is not to improve the image or profitability of Google Inc., it might not hurt. Just as a growing number of employees want to work for a purpose, more and more consumers are gravitating towards companies that inspire them. Says Baxter: “A consumer reading about this might think, ‘I want to use Google because they’re people who put their money where their mouth is.’”