News and analysis
October 16, 2011

A Thirtysomething Billionaire Couple Take on Tough Issues Via Giving

Laura Burlton

“We have the benefit of being young, so we can look at very complicated problems,” says John D. Arnold, of the foundation he started with his wife, Laura. “We have years to see these through.”

Back when John D. Arnold was a 26-year-old trader with Enron, the now-disgraced Houston energy company, he sent an e-mail to co-workers rustling up donations to the United Way.

A colleague shot back with a playful reply: “I trust you have set a good example for us all to follow by contributing 20% of your gross income. Don’t let us down.”

As it turns out, 20 percent was a rather modest expectation for Mr. Arnold’s giving.

Now 37, he was awarded an $8-million bonus before Enron’s collapse and started a hedge fund that manages an estimated $5-billion. (Mr. Arnold, who was never accused of wrongdoing in the Enron case, declined to comment on his personal wealth. Forbes most recently pegged his net worth at $3.5-billion.)

He and his wife, Laura, a former corporate lawyer and businesswoman, intend to donate nearly all of the money they make through a foundation they created to improve the criminal-justice, education, and pension systems. The couple has donated about $670-million to date to the fund, which bears their names.

Emphasis on Research

Like other Generation X megaphilanthropists—eBay’s Pierre Omidyar and Jeff Skoll, for example—the Arnolds are not of the “name a building at my alma mater” school of philanthropy.

They are trying to improve America’s flagging public-school system by supporting charter schools, merit pay for teachers, and other sometimes contentious ideas. The Arnolds have focused on criminal justice by paying for ways to curb false eyewitness identifications and reduce the rates at which former prisoners get in trouble with the law. On pension issues, the couple is bankrolling research and efforts to educate the public and lawmakers on ways to get state and local government pension programs on stronger financial footing.

The Arnolds approach each of these topics in an analytical way, exhaustively researching possible solutions and then paying for studies to determine what works.

“We have the benefit of being young, so we can look at very complicated problems,” says Mr. Arnold. “We have years to see these through.”

First Gifts to Education

The Arnolds got their start in major-league philanthropy by supporting education charities.

Shortly after Mr. Arnold opened his hedge fund, Centaurus Energy, in 2002, he read a newspaper article about the city’s Knowledge Is Power Program, or KIPP. The group is a national network of 109 charter schools established by two Teach for America alumni that has shown success in getting children from poor families into college.

Mike Feinberg, a KIPP co-founder and superintendent, recalls getting a call out of the blue from Mr. Arnold. The two met, first at KIPP’s Houston campus and again over beers.

“It was kid meets kid, how are we going to fix the world,” says Mr. Feinberg, who was slightly older than Mr. Arnold, in his early 30s.

In 2004 Mr. Arnold made his first gift, $30,000. Two years later, the Arnolds together pledged $10-million to help KIPP Houston grow to 42 schools in the city by 2017. (Because of the economic downturn, KIPP now says it will take until 2020 or 2025 to meet that goal.)

Other big grants include $10-million to help Washington city schools offer higher pay to teachers who receive the strongest performance evaluations, a $25-million pledge to Teach for America, and a $20-million pledge to StudentsFirst, the education-policy group started by Michelle Rhee, former Washington schools chancellor. The foundation is also compiling a database of studies on education issues that the Arnolds hope will be a resource for policy makers, donors, and journalists.

No 'Mutual Fund’ Giving

Ms. Arnold, 38, says that in the mid-2000s, she and her husband moved away from what she describes as “mutual fund”-style giving—supporting a variety of nice-sounding nonprofits without much research into their effectiveness—to a much more strategic approach.

In 2008 they established their foundation. Shortly after, they began to apply what they’d learned to criminal justice and pensions, two other big social problems for which they felt their money could make a difference.

Barry Scheck, a co-founder of the Innocence Project, which works to free people who have been wrongfully convicted, recalls visiting Houston at the behest of a group of wealthy people who were interested in learning more about issues facing the criminal-justice system. At the time, he didn’t realize that Ms. Arnold, a Yale-trained lawyer, was one of the people behind his invitation.

But soon after, she called him to inquire how the group was faring after losing support from the Jeht Foundation, a New York grant maker that had just been felled by the Bernard Madoff investment-fraud scandal.

A little later, in April 2009, the Arnold foundation gave $150,000. It has made other grants since, including one to help the Innocence Project test ways that police officers ask eyewitnesses to identify suspects with the goal of reducing false identifications. Last fall, Ms. Arnold joined the group’s board.

The foundation’s work on pension issues is focused on educating people and politicians about alternatives to traditional state and local government pension plans. Mr. Arnold says it doesn’t make sense from a financial or governance perspective for governments to bear all the risk of their employees’ investments. The fund has so far given $150,000 to a California nonprofit to study the cost savings of new approaches, including plans that require workers to contribute more of their own money to retirement, and $186,000 to a think tank in Florida for similar research.

Ambitious Donors

In many ways, the Arnolds are the consummate overachievers who are now channeling their energy and ambition into philanthropy.

Mr. Arnold grew up in Dallas. His father was a corporate lawyer; his mother worked as a preschool teacher and an accountant. Mr. Arnold graduated from Vanderbilt University in three years. He then took a job at Enron, quickly becoming one of its star traders.

“I figured I could go and do anything in the field of finance for a couple of years and then go to business school,” he says. “But things went well, and I never made it to business school.”

Ms. Arnold moved to Brandon, Fla., from Puerto Rico when she was 10. Her mother is Peruvian, and her father, who worked as an engineer, is Puerto Rican but grew up in New York City. She went to Harvard, then to the University of Cambridge for a master’s degree in European studies before getting her law degree from Yale. In 2006 she left her job at an energy company she helped to start to focus on philanthropy.

“I spent my life being ambitious,” says Ms. Arnold. “At some point, you realize that your highest and best use isn’t related to your personal work and your ambition. It’s related to the resources you’ve been given and your ability to make transformative change.”

People who have worked with the Arnolds say they ask a lot of tough questions while revealing little emotion.

“They are demanding of themselves, they are demanding of others. They are not satisfied with doing things halfway,” says Jim Crownover, chair of Rice University’s board, on which Ms. Arnold serves. “They are really serious, driven people.”

Mr. Feinberg, of KIPP, says the Arnolds strike a good balance between two extremes in philanthropy. (For more on the Arnolds’ views on giving, see below.)

“There are some philanthropists who give without a lot of strategic purpose,” he says. “There are other philanthropists that run things like a business and expect to make a profit, which in this case would be a social return. In some cases, they lose track of the art of giving.” The Arnolds, he says, have been able to combine the best of both.

Facing Critics

The Arnolds are likely to attract criticism as they wade deeper into prickly issues like pension and education reform.

Labor unions, teachers unions, and some economists oppose changing pension plans in ways the Arnolds support.

Steven Maviglio, a spokesman for Californians for Retirement Security, a coalition supported by labor unions, says the California pension group backed by the Arnolds is “ideologically driven” and questions why it took nearly six months of pressure before the group revealed the identity of its donor.

A spokeswoman for the Arnold fund said the philanthropy typically shares information about its grants when it reports that information to the government through tax filings, not when it makes the grant. But in certain cases like this one, in which a grantee wants to publicize the donor’s identity ahead of the tax deadline, the foundation says it is happy to do so.

And critics of charter schools and other efforts championed by the Arnolds say such approaches haven’t been shown to work and threaten to undermine traditional public schools. Diane Ravitch, the former Bush administration official turned critic of education reform, classifies the couple among a cadre of billionaires trying to exert their influence over public schools.

The Arnolds say that critics of education reform oversimplify their approach. They also say they are keen on evaluating whether charter schools and other improvement efforts make a difference: For example, they are supporting a study to see whether students who enroll in KIPP end up better off than those who apply but don’t win entry.

While the Arnolds say their approach to giving may continue to evolve, they seem undaunted by the possibility of failure. While they may never be able to know the precise impact of their giving, they say it’s still worth doing.

Ms. Arnold analogizes their perspective to the response her husband’s doctor gave Mr. Arnold when he questioned the precise impact of taking anti-cholesterol medications. Mr. Arnold wondered if there really was solid research to show that the medicines helped and why. The doctor’s response: “We don’t know what the marginal value of taking them is. But we do know that people who don’t take them are dead.”

Of their philanthropy, Ms. Arnold says: “We may not know exactly what the specific incremental value is of our investments. But we have a sense of what will happen if we don’t push the envelope—and that is not a whole lot.”