News and analysis
February 06, 2011

A Brash Hedge-Fund Manager Applies His Tactics to Philanthropy

William A. and Karen Ackman

A few years ago, Cheryl L. Dorsey was hosting a lunch for Echoing Green Foundation, the social-entrepreneurship fund she runs, when a man she had never met before approached her.

“If Echoing Green is as good as you say it is, I’ll commit $1-million and get involved,” she recalls him saying.

Not too long after, the then $2.6-million New York group had the money—and the man on its board.

That kind of move is quintessential William A. Ackman. The 44-year old hedge-fund manager is well known in the financial world for his brash brand of activist investing, by which he has amassed a fortune that Forbes magazine last year estimated at $700-million. (Mr. Ackman declined to confirm whether that is accurate.)

He’s not yet a familiar name in philanthropy—but that could change.

By many accounts, Mr. Ackman, who makes swift decisions and likes to nudge grantees to try new approaches and reach more people, wants his giving to achieve an audacious goal: changing the world.

Through a foundation they created in 2006, Mr. Ackman and his wife, Karen, plan to eventually give away most of their wealth. Last year, they donated $58-million to the Pershing Square Foundation, whose name reflects Mr. Ackman’s Pershing Square Capital Management, the hedge fund he started in 2004. The contribution, along with $1.3-million they gave to 50 other nonprofits, puts the Ackmans in the No. 17 spot on The Chronicle’s list of the most-generous donors.

Avoiding Bureaucracy

The foundation is awarding grants at that same fast clip, pledging $84.3-million so far.

Last fall, it hired a chief executive, Paul Bernstein, the former managing director of U.K. charity Absolute Return for Kids. He is charged with turning the organization into a more-professional operation while keeping it free of the sort of bureaucracy to which Mr. Ackman is allergic.

Mr. Ackman’s money, meanwhile, is behind high-profile efforts such as the attempts by Mayor Cory Booker of Newark to transform the city’s schools; a Facebook co-founder’s nonprofit-centric social-network, Jumo; and a collaboration among Harvard University, the global-health activist Paul Farmer’s charity, and a hospital system to improve health-care delivery in poor countries.

Mr. Ackman’s style might sometimes seem like self-interested grandstanding. In 2007, under scrutiny from regulators, he said he would donate any personal profits from his financial bet that the stock of the bond-insurer MBIA would fall.

It was a shrewd move for someone who had been accused of seeking to take down MBIA for personal profit.

Mr. Ackman was vindicated, however, when his warnings about MBIA and its exposure to mortgage-backed securities proved prescient after the nation’s financial crisis hit.

'Reallocation Time’

Mr. Ackman’s generosity stretches back to his college days and even before.

Raised in an affluent family in Chappaqua, N.Y., Mr. Ackman says he started thinking as an undergraduate at Harvard about earning a lot of money and giving it away. One of the biggest influences on his thinking was the writing of John Rawls, the political philosopher, who argued that it was not only ethical, but logical, for the world’s wealthiest to help the least fortunate.

“My plan was to be really successful and do well and reallocate the money in the way that makes the most sense,” says Mr. Ackman. Now, he says, it’s “reallocation time.”

Mr. Ackman is approaching that reallocation in much the same way he invests in companies. He even uses the same language to describe what he looks for: “people, opportunity, context, and deal.”

The people are nonprofit leaders like Andrew Youn, a business-school graduate who founded the One Acre Fund to provide training and loans to farmers in East Africa. They are also people like Charles Best, who got the idea for a Web site called DonorsChoose while working as a high-school teacher in the Bronx, and Mr. Booker, the Newark mayor, for whose education efforts Pershing Square Foundation has pledged $25-million.

The “opportunity,” as Mr. Ackman sees it, is the social problem that a nonprofit is trying to solve. In broad strokes, he and his wife are drawn to projects to improve schools in the United States, promote peace and justice, and help poor people earn money. “Context” and “deal” have to do with the nonprofit’s approach—he favors organizations that have the potential to grow significantly and even become self-sustaining.

While Mr. Bernstein is charged with taking Mr. Ackman’s idiosyncratic style and developing ways to measure grantee success, Mr. Ackman still plans to make decisions swiftly. He says: “In 30 minutes, I can give you a pretty high probability of whether we are going to do something or not.”

Tough Questions

To interact with him as a grantee, meanwhile, is to have your ideas and business plans tossed around, poked, prodded, and, if they fall short, cast quickly aside.

Mr. Ackman pushed Echoing Green to develop a way that it might profit if the entrepreneurs it backs with start-up capital go on to make lots of money.

The move was inspired, in part, by Echoing Green’s experience with Vikram Akula, founder of SKS Microfinance in India and an Echoing Green fellow in 1998. The for-profit microfinance firm recently reaped hundreds of millions when it went public, but Echoing Green got no return on its investment.

Mr. Ackman also helpedDonorsChoose, which enables people to give directly to public-school projects online, devise what Mr. Best calls a matching-gift offer “on steroids,” slashing the “price” of nonprofit projects on the charity’s Web site to $98 in an attempt to encourage more people to donate. “Bill Ackman is an unorthodox philanthropist,” says Mr. Best. “He was pretty unimpressed with the traditional match offer.”

For all Mr. Ackman’s philanthropy-business mindmeld, some of his giving is traditional. For example, he recently helped the Center for Jewish History, on whose board he serves, raise $30-million to retire its debt. His foundation has given the New York group $6.8-million.

Mr. Ackman’s philanthropic sensibilities have also been shaped by scrutiny he took from regulators when he had a financial stake in whether MBIA’s shares fell. The sense that he was being unfairly accused by overzealous regulators left him suspicious that prosecutors often get it wrong.

“It seemed to me that there was not an interest in whether I was guilty or innocent,” he says. “I could defend myself. Imagine if you’re poor.”

Hence his foundation’s grants of more than $1.1-million to the Innocence Project, in New York, and Centurion Ministries, in Princeton, N.J., two groups that work to free people who’ve been wrongfully convicted.

Ms. Ackman, who is a trustee of Human Rights Watch, in New York, is perhaps more intimately involved with human-rights issues than her husband. A landscape architect, she also serves on the board of Friends of the High Line, the charity that transformed a stretch of an old elevated railroad line in New York City into a public park.

Ms. Ackman, who declined an interview, cuts less of a presence at the foundation, whose three employees work on the same floor as her husband’s hedge fund’s Midtown office.

“Karen is a more private person than Bill,” says Amy Herskovitz, Ms. Ackman’s sister. A former social worker, Ms. Herskovitz led the Pershing Square Foundation until Mr. Bernstein was hired last fall. She remains one of three staff members.

Hedge-Fund Investments

Mr. and Ms. Ackman, meanwhile, are the foundation’s sole trustees. That’s not enough people to ensure diversity of opinion and guard against overreach, says Aaron Dorfman, executive director of the watchdog group National Committee for Responsive Philanthropy.

Mr. Ackman says he is open to expanding the board and that he already has an advisory board that includes five other people who do provide much the same role of a governing board—minus, of course, the fiduciary responsibilities.

But other aspects of Mr. Ackman’s style could draw criticism. He is investing the foundation’s money in his hedge fund, where he says it can post the best returns. But the practice of donors’ investing money in their hedge funds is one the Internal Revenue Service is scrutinizing, in part because it skirts the line of what is considered “self-dealing.”

Mr. Ackman says he has waived fees on the foundation’s investments and does not benefit from having the extra money to manage, in part because it amounts to a small share (just over 1 percent) of his fund.

Mr. Ackman’s influence in the philanthropy world, meanwhile, seems poised to grow.

Allen Model, co-founder emeritus of Overseas Strategic Consulting and a member of the advisory board of Mr. Ackman’s foundation, says: “There’s no question in my mind he wants to one day look back and feel that, on some aspects of philanthropy, his influence has been transformative in the way his hedge fund has been.” Says Mr. Youn, of One Acre: “Ambition to Bill means something different than to the rest of us.”

Asked if he would ever leave finance for full-time philanthropy, Mr. Ackman says probably not, at least not anytime soon: “I can make a bigger difference in the long term if I stay here for the intermediate term.”

Leaning back on a low-set couch in his corner office, snow-dusted Central Park stretched out beyond huge glass walls, he then exhibits a rare touch of modesty.

“I might not be that good at philanthropic stuff,” he says. “I’m pretty good with this.”