Philadelphia Reflections

Perpetuities

Although some churches and mummies are well preserved after thousands of years, and no doubt a few corporations do last century, the fact is most of them don't last very long. Most new corporations go bankrupt within ten years, and only one (General Electric) of the original thirty members of the Dow-Jones Industrial Average existed in 1900. Members of the Dow may seem the biggest and best, but in fact, live on a slippery slope. Not-for-profits, like churches, may do somewhat better, although the handful who approach perpetual status may be rare exceptions. One big reason not to leave a major bequest to any of them may well be that most will not survive. While we are on this subject, the same reasoning applies to the stock in for-profit corporations. Since few of them thrive for more than seventy-five years, the idea of buying their stock, holding it forgotten in a safety-deposit box, and passing it on intact to heirs, is probably doomed to investment failure. The oldest stockholder company in America is called the Proprietors of West Jersey, founded in 1676 but still meeting once or twice a year. It would be moderately interesting to know how well this investment performed over the years, but Google sounds like a better bet offhand. Just don't hold it too long.

Cotton Mather

There may be a connection between success as a non-profit and success in the merciless marketplace. Those who have compiled statistics will tell you that steadily withdrawing more than 4% a year from an endowment portfolio, sooner or later leads to a day when there is nothing left. Most trustees expect better results than that, and most managers of non-profits will need more than that, no matter how big the pile was when they started. Sooner or later, markets will decline, mistakes will be made, and the endowment will be exhausted by "emergency" withdrawals which relentlessly withdraw more than 4%. This pitiful decline might be avoided by gathering the managers of influential non-profits together, giving them a stern lecture, and somehow forcing them to live within their means, but offhand nothing sounds more futile. Jonathan Edwards and Cotton Mather were said to be good at haranguing. But since it must be obvious that non-profits usually survive by constantly soliciting fresh endowment funds, what would be the matter with taking a direct approach to that goal. Why not just state in advance that the institution is only intended to do its good work for say fifty years, and then it must turn its residuals over to somebody else? Not many endowments have been limited to a lifetime of fifty years, but in those who have done so, the experience seems to be that most of them immediately set about to raise additional funds to keep the institution from disappearing. The American Enterprise Institute in Washington, for example, started out dispensing about a million dollars a year; last year it dispensed over $30 million. Whether he intended it or not, the message Mr. Olin transmitted was not that think tanks are only good for thirty years. He told his executors in effect, "You have some seed capital with which to start a think tank. Whether it lasts longer than fifty years, is now up to you."

Originally published: Tuesday, April 26, 2011; most-recently modified: Friday, May 31, 2019