The centenarians square up

“ONE simple way to assess the impact of any organisation is to answer the question: how is the world different because it existed?” That is the test set out by Sam Palmisano in the foreword to a new book celebrating the 100th birthday of IBM, the firm he has run since 2002. But another organisation is also turning 100 this month—the Carnegie Corporation of New York, a flagship of American philanthropy. Mr Palmisano's insight is too good to limit to only one of the centenarians. A better question is: which has done more for the world, one of its leading companies or one of its most influential charities?

At first glance, IBM and the Carnegie Corporation seem to be engaged in such different endeavours that comparing them might seem about as sensible as comparing apple orchards and orange groves. Making money has always been the main aim of the company formed in 1911 by the merger of three small producers of mechanical accounting machines, scales and time recorders, and renamed International Business Machines 13 years later. By contrast, the Carnegie Corporation explicitly set out to create a better world by giving away what remained of the great fortune of its industrialist founder, Andrew Carnegie. Yet both can assert that they have made the world a better place during the past century, and it is far from obvious which claim is stronger.

The answer matters, and not just in order to award the historical bragging rights. Comparing the records of those giants of 20th-century American capitalism—or “philanthrocapitalism”—can shed light on a question that is keenly debated today: whether philanthropy or business is more effective at “Making the World Work Better”, to borrow the title of the book celebrating IBM's centenary.

The comparison can also help answer an old question about the proper role of business in society. Many people would agree with Milton Friedman's view that the “only social responsibility of business” is to “increase its profits”. But Michael Porter, a management guru, recently caused a stir by arguing that firms should seek instead to create “shared value” that simultaneously benefits both the firm and society. Andrew Carnegie would have shared Friedman's view of business, saving the philanthropy until after the money has been made. IBM, at least after Thomas Watson senior took charge in 1914, has arguably been a case study in how to create shared value, both through its formalised giving, which is among the most generous in corporate America, but more fundamentally through its everyday business.

And the comparison can shed light on the role of the wealthy in society. Bill Gates, the Andrew Carnegie of today, is busily giving away the fortune he earned in business—a fact that has irked some prominent critics. A few years ago, Robert Barro, an economist, argued in the Wall Street Journal that by switching from making money to giving it away, Mr Gates had failed to appreciate both the good he had done at Microsoft and the waste that he was about to preside over as a philanthropist. “By any reasonable calculation, Microsoft has been a boon for society and the value of its software greatly exceeds the likely value of Mr Gates's philanthropic efforts,” concluded Mr Barro.

Yet Mr Gates and his partner in philanthropy, Warren Buffett, are not only confident they can improve the world by giving away their money through a charitable foundation much like the Carnegie Corporation (only bigger). They are also trying to persuade other billionaires in America and abroad to pledge publicly to give away at least half of their wealth during their lifetimes.

Present at the creation

However much their paths diverged, IBM and the Carnegie Corporation were both born at a critical point in the evolution of America's capitalist democracy. Carnegie had built his fortune during an unprecedented period of large-scale industrialisation, the social costs of which were clear by 1911. The legitimacy of the wave of new big businesses and of the wealthy men who created them was increasingly questioned, as trustbusters challenged “robber barons” such as Carnegie and John D. Rockefeller (who created his charitable foundation in 1913).

At the same time, there was growing excitement about the capacity of expert knowledge to transform not just business but society, too. Carnegie and Rockefeller reflected this in calling their thoughtful, long-term approach to giving “scientific philanthropy” (today's donors call it “strategic philanthropy”), which they contrasted with the short-term wastefulness of much of the charity of the time.

In a way, therefore, IBM and the Carnegie Corporation had similar missions. The Carnegie Corporation's explicit goal was to “promote the advancement and diffusion of knowledge and understanding”. Thomas Watson senior, who ran IBM for over 40 years, made “Think” its motto and built the business around “the idea that information was going to be the big thing in the 20th century”, according to Richard Tedlow, author of “The Watson Dynasty”. He established a research arm in 1917, which went on to generate world-class, blue-sky research as well as more patents than any other corporate laboratory.

By 1911 Carnegie was near the end of his career, whereas Watson's was only starting. But both men were fired by idealism to such an extent that their peers thought them strange. To some wealthy Americans, Carnegie's 1889 essay, “The Gospel of Wealth”, with its assertion that the “man who dies thus rich dies disgraced”, smacked of socialism. (Ironically, founding the Carnegie Corporation was an implicit admission that Carnegie would indeed fail to give away all his fortune before his death, and thus need an institution to continue his philanthropic work.) Watson senior “struck his contemporaries as a nut and a crank with his policy that ‘People who perform are my partners',” according to the late management guru, Peter Drucker.

Idealism was sharpened by feelings of guilt over earlier ethical lapses. Carnegie regretted the brutal breaking of a strike by his workers at Homestead in 1892, which cost ten lives. Watson was chastened by his conviction for antitrust offences at his previous firm, NCR—though the conviction was later overturned.

Both men brought about huge change by building institutions that became role models. The initial endowment of the Carnegie Corporation, at $125m ($3 billion in today's money), exceeded the total value of all American foundations at the time. Over the following 20 years, spanning America's first golden age of philanthropy, rich donors endowed around 250 new foundations with combined assets of $32 billion in today's money, according to Philanthropy Magazine. Many of them tried to imitate the scientific philanthropy of the Carnegie and Rockefeller foundations. At IBM, Watson introduced employment practices that became the norm in big business decades later. In 1915 he gave a speech known as “the Man Proposition” declaring all employees equal. That was later expanded to include women, who from 1935 received equal pay for equal work. From 1945, all IBM workers received pensions.

Still, in the first 50 years, the impact of the Carnegie Corporation on society dwarfed that of IBM. When it was created, the corporation's power in some respects equalled or exceeded that of the state. One of Carnegie's goals was to keep things that way, by building a model of society that differed from what he saw as dreadful, big-government socialism that was taking over in Europe. He succeeded only up to a point: the Carnegie Corporation's initial endowment was 27 times bigger than the annual federal government education budget; the much larger endowment of the Bill & Melinda Gates Foundation is about double the annual education budget of New York City.

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.

The Carnegie Corporation also paid for two reports that fundamentally changed America's conception of itself. The first, in 1944, was “An American Dilemma: The Negro Problem and Modern Democracy”, by Gunnar Myrdal, a Swedish economist. It showed that African-Americans were being held back by widespread and institutionalised white racism. The second, published in 1959, was “The American High School Today”, by James Conant. It played a big part in establishing the idea that large schools are the best way to give students a comprehensive education. John Gardner, president of the Carnegie Corporation from 1955, was also important in developing the Elementary and Secondary Education act of 1965, which provided the first large slug of federal funding for public schools. Carnegie money also financed the discovery of insulin, sparing millions of people with diabetes from an early death.

Even Carnegie's failures say something about the scope of his ambition. The philanthropist built a Peace Palace in The Hague, and funded the Carnegie Endowment for International Peace. That he could not prevent the first world war plunged the septuagenarian steel tycoon into a depression. Still, whether or not the Carnegie Corporation really kept socialism out of America, it is easy to imagine that by the middle of the 20th century, the country would have been a different—and probably worse—place without it.

Big-hearted Blue

Not until its second quarter-century did IBM count for much. But by its 50th birthday IBM was one of America's leading firms, earning profits of $254m on revenues of $2.2 billion and employing 116,000 people. Those 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.

As well as making an important commercial entry into the public arena, by providing the backbone of a new social-security system introduced by Franklin Delano Roosevelt in 1935, IBM also spent a lot of money on research. By 1935 it employed 300 engineers and, Watson reckoned, some 95% of its profits were generated by innovations introduced since 1917. This effort soon expanded through partnerships with universities and embraced pure research as well as the more applied, commercially driven sort. At one extreme, for instance, the benefits to society include the bar code, IBM's version of which became the standard. The firm also took part in such crucial national initiatives as America's space programme (a newly installed IBM system helped save the stricken Apollo 13). And at the other extreme it also helped form the minds of such future Nobel laureates as Benoît Mandelbrot, the pioneer of fractal geometry, and Gerd Binnig and Heinrich Rohrer, inventors of the scanning tunnelling microscope which let scientists see individual atoms.

IBM, like Carnegie, also did its bit for civil rights. In 1953 Thomas Watson junior, a similarly idealistic soon-to-be successor to his father, threatened to cancel plans for plants in Kentucky and North Carolina if they could not be fully racially integrated. After a stand-off, the state governors backed down, and the plants opened three years later.

A game of two halves

Still, not all of their contributions in their first 50 years were positive. Watson senior, as public as Carnegie in his enthusiasm for world peace, believed that this cause was best advanced through trade between nations, including Nazi Germany. In 1937 Hitler personally convinced him he did not want war. As soon as Germany invaded France in 1940 Watson realised his mistake, and tried to distance IBM from the Nazis, but the company's German subsidiary provided a machine that was used in the Dachau concentration camp. (Lesson learned, IBM was among the first international companies to pull out of South Africa in the late 1970s in protest against apartheid.) The Carnegie name was also linked indirectly with the Nazis, through the Carnegie Institution's funding of research into eugenics in the early 20th century that was later taken up by Germany.

In their second 50 years the two institutions' impact has arguably been reversed. Carnegie had a couple of triumphs in the 1960s, helping the launch of public broadcasting in America and the creation (for educational reasons) of “Sesame Street”, the most popular children's television show ever. But since then, Carnegie has seen its influence decline. Among other things, it has suffered from philosophical self-doubt (a report it commissioned in the 1970s in effect urged America to embrace European-style socialism) and the emergence of newer, bigger philanthropies (by assets, it now barely scrapes into America's top 20 foundations). Although Carnegie still does important work, such as its efforts to understand Islam, championed by Vartan Gregorian, its current president, the corporation is showing its age.

IBM, by contrast, is now as influential as it has ever been, with a stockmarket value of around $200 billion and nearly 427,000 employees, many of them in the developing world. 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. Firms in other, dirtier industries may not compare against philanthropy so well.

IBM has also been unusual in keeping up its significant investment in relatively pure research, which can have large social benefits. They were seen most recently in the development of Watson, a computer capable of beating human champions at the game “Jeopardy!” just as its Deep Blue computer earlier saw off several human chess grandmasters. In this respect, IBM may be a model for Mr Porter's idea of shared value. But is its approach replicable or is it just an exception? AT&T's Bell Labs and Xerox PARC have left their glorious histories behind them, yet somehow IBM's research culture has survived. What differentiated IBM seems to have been a decision in the late 1970s to create a series of joint projects between product developers and IBM researchers.

Why, by contrast, has the Carnegie Corporation seen its influence decline? There are many possible explanations. While it has stayed the same during the past 50 years, governments and private companies have grown far bigger. Alan Pifer, the foundation's president after Gardner, has likened traditional foundations such as his to the dodo, saying that they now need to develop “slim bodies and well-developed wings”. This meant focusing on “critical points of leverage”, where a foundation's grants could have a disproportionately large effect by influencing the money and power of other institutions, not least government. Today's leading philanthropists, from Bill Gates down, also talk the language of leverage—but there are grounds to think they are doing better at it than the Carnegie Corporation is.

Another reason for Carnegie's relative decline may be that 100 years is too old for a philanthropic foundation. The absence of an existential threat may have made it too comfortable. IBM transformed itself under Lou Gerstner when it nearly ran out of cash in the early 1990s, and again more recently under Mr Palmisano when Indian rivals threatened to steal its business. By contrast, it is not clear what, if anything, keeps the people in charge of the Carnegie Corporation awake at night. The passage of time saps a foundation of the unique energy of its founder. Carnegie said of the unknown future leaders of his foundation that “they shall best conform to my wishes by using their own judgment.” That much they have done, but he would probably have fared better.

No wonder many of today's philanthropists aim, as Carnegie did, to give away all their money by the time they die, or at least put a time limit on the lifespan of their foundation after their death. The Gates Foundation will have to be wound down 50 years after the second of Bill and Melinda Gates dies.

The achievements of IBM and the Carnegie Corporation are impossible to quantify mathematically. What seems clear, though, is that as it enters its second century, IBM can plausibly hope that its best years lie ahead. Alas, that seems most unlikely for Carnegie.