Anthropic’s showdown with the Pentagon + How much value should private equity buyout funds share with workers

It's Friday, March 6th. I'm Brian Walsh and welcome to this Week in Impact, where I talk with Impact Alpha journalists and editors about some of the most interesting impact investing stories we featured this week. I'm back with editor David Bank. We'll discuss drawing the How Anthropic standoff with the Pentagon is putting impact Investors AI thesis to the test in real time. Plus, private equity has a reputation for extracting value from companies. What happens when it starts sharing that value with the workers actually creating it? And finally, six reasons foundations say they can't do impact investing and why a foundation executive says every single one of them is wrong. That's all coming up on this Week in Impact. Hi David, how are you doing this week?

0:00

I'm doing fine, Brian. Another week, another geopolitical crisis.

0:45

Yeah, indeed. These crises seem to be coming with

0:49

epic fury, fast and furiously.

0:51

And I know that you've been working on next week's Agents of Impact call,

0:54

which will be on Wednesday, March 11 at 1pm Eastern.

0:57

What's the topic going to be?

1:01

Well, it's about aging as an asset or valuing aging. It's a little bit full circle for me. My gig before Impact Alpha was all around encore careers, the kind of social purpose work people might do beyond their earlier work life and before their actual retirement. And that whole notion of sort of reinventing aging is becoming quite a hot topic and also an investable thesis.

1:02

All right, well again that call will

1:30

be on Wednesday, March 11th at 1pm

1:31

we'll have a link in the show

1:33

notes to RSVP but for today's show, first up, impact investors have long made the case that you can back AI responsibly. This week that thesis got its most public stress test yet. Anthropic, the Safety first AI company in which Omidyar Network, the Ford foundation and the Nathan Cummings Foundations all took a stake two years ago, found itself in a full on standoff with the Pentagon over autonomous weapons and mass surveillance. The impact investors involved were unequivocal in their support of the company. But just days before the deadline, Anthropic quietly relaxed its own responsible scaling policy, citing a competitive environment that has shifted away from safety. So David, you wrote the article about this. How do you read what's happening here and what does it mean for the impact investors who put their thesis on the line?

1:34

Yeah, Brian, Anthropic showdown with the Pentagon kind of crystallized so many incipient kind of issues around AI. For starters, it's a battle of the

2:21

tech titans, kind of a throwback to some earlier kind of tech battles.

2:31

But OpenAI that jumped out as the industry leader, raised $110 billion last month at a $730 billion pre money valuation,

2:37

I think making it one of the biggest private companies ever.

2:47

Anthropic, not to be outdone, raised its own $30 billion round at a $380 billion valuation. Both of those companies kind of getting

2:51

ready for their IPOs and angling for

3:00

any advantage into which the Pentagon sort of inserted itself. And Anthropic held its, its ground on two key questions about mass surveillance of

3:03

Americans and autonomous weapons systems, and said that their system, called Claude, wasn't ready for, for either of those and that in fact the, the mass surveillance part at least seemed to be a constitutional violation as well. I don't know what they would say about autonomous weapon systems, meaning weapon systems essentially that can kill without a human in the loop.

3:14

And, and it looked like smithereens for a moment for Anthropic, the big bad

3:36

Pentagon coming down and declaring them a supply chain risk, which in fact they have done.

3:42

But it turned out to be kind of a, I don't know, blessing in disguise, because taking that stand in favor

3:49

of responsible AI, in favor of guardrails, in favor in some cases of going slower in development, sort of pushed Anthropic

3:56

both into the public eye.

4:03

It became the most downloaded app on the App Store.

4:04

Folks probably who didn't know Anthropic a

4:08

week ago are now switching from OpenAI to Anthropic.

4:12

So it's kind of got some lessons as well, which is that holding the

4:14

line, standing firm on values can pay off in the long term, even though you might lose a $200 million Pentagon contract.

4:19

Right.

4:29

Pete Hegseth, the Secretary of the Defense, or what they call the Secretary of War, might be one of the chief marketers for Anthropic and their Claude chatbot.

4:29

Yeah, useful bogeyman in any event. And it does bear out the thesis of the impact investing crowd that have been arguing for investors, responsible investors, to

4:39

get involved in investing in AI as a kind of counterweight to the move fast and break things crowd that will say, hey, we can deal with downsides in due course after we score this

4:53

lucrative IPO or what have you. And the notion is that enterprises, corporations

5:09

and others, including the Pentagon, have risk concerns. They want there to be sort of guardrails and safety mechanisms. They want to be able to audit the thing. They want to be able to know when it's going hallucinating and everything else.

5:14

And that over time that will be

5:29

a better business, even if possibly somewhat slower business.

5:32

So this whole episode gave that crowd

5:36

a chance to kind of play that debate out in public. And corporate users and others say, hey, not so bad for a company to

5:40

take a second or two to check

5:47

the algorithms, to check the models, to make sure that it's fit for purpose, for what it's being used for. And I think this will become a much more active area for impact investors to get involved in actually owning a

5:50

piece of the AI infrastructure.

6:03

Not just using AI in investing or using AI for healthcare or even for climate action or things, but actually owning and investing and having a say in the infrastructure itself and the companies themselves.

6:06

But what kind of influence can these

6:17

impact investors have when the size of their investments kind of dwarfs in comparison to the overall size of these companies? I mean, you wrote in the article that these impact investors collectively put in $5 million into anthropic two years ago, and it's now worth a quarter of a trillion dollars. So what kind of actual real leverage do they have to kind of engage the company management?

6:19

Well, if you did the math, it's

6:43

0.000 something of anthropic's cap table. So not much at that level, but

6:46

a kind of moral suasion. And I think that's what they went into it thinking. They would have at least the ability to pick up the phone and talk to Dario and Daniela Amode, the heads of Anthropic and in sort of civil

6:51

society and others to discuss things with the company.

7:07

And my understanding is that that in fact has happened.

7:10

So at some level you at least get your call returned or get invited to the shareholders meeting.

7:13

And so Anthropic has kind of carved out a role that again will be valuable going forward, even if it's kind

7:19

of the number two right now to OpenAI and those investors.

7:28

Their $5 million, I think is worth

7:32

more than that now. But again, it's not very much in the, in the company terms, but it is a kind of marker that there's sort of another kind of class of investors that are looking for responsible AI, that are looking for good AI, that are looking for guardrails and even for regulation.

7:34

Right. This kind of lines up with the idea of responsible AI and responsible investing kind of joining forces. Because the responsible investing playbook for many years was for certain activist investors to take a very small stake in a publicly listed company, and then that would allow them to then offer resolutions at their annual meetings and different proxies that they could then rally other shareholders to engage on their various sustainability issues.

7:52

Yeah, Omidity Artwork's Mike Kubzansky told us, quote, when an AI company draws a

8:19

line against autonomous weapons and mass surveillance and holds it under enormous government pressure, that's our investment thesis in action. So they're standing behind the company and

8:24

willing to possibly take a hit on the valuation. Although, as I said, I don't think

8:36

the hit has even come. I think if anything, Anthropic is probably worth more now than it was before the standoff.

8:40

Yeah, of course. And then OpenAI cut its own deal with the government after the Anthropic deal fell through.

8:45

Yeah, and actually, interestingly enough, held out its own signature on the basis of

8:51

mass surveillance and other things too, and actually got some reassurances from the Pentagon,

8:58

which might have been enough, frankly, for

9:01

Anthropic to agree as well.

9:04

So it does seem a little bit like Anthropic was picked out as the

9:06

whipping dog of the Trump administration or of the Pentagon. And in fact, maybe that worked out well for both sides.

9:12

All right, well, you can read David's piece on Anthropic and impact investors on

9:20

impactalpha.com, there's also a link in our show notes, and that's all part of

9:24

our continuing coverage called Shaping the Algorithm.

9:27

So check that out as well.

9:30

And speaking of who captures value, later, we'll look at a guest post challenging foundations to stop leaving 95% of their capital on the Impact sidelines. But first, private equity has a reputation for extracting value from the companies it buys. But what happens when it starts sharing that value with the workers actually creating it?

9:32

That's when we come back.

9:51

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9:53

Next up, a $13 billion private equity firm is making the case that sharing equity with frontline hourly workers isn't just

10:16

the right thing to do.

10:23

It's a better way to generate returns. As our Rudy Sanadis reported, the Riverside company has spent six years turning that thesis into a track record. But David, how much are they really sharing with their workers? Is this genuine wealth building or a feel good bonus dressed up as ownership?

10:24

Maybe both. Brian the Glass Half Full view Is that at least we're discussing how much wealth should private equity companies share with

10:41

their workers upon exit of the companies they buy.

10:50

The maybe glass half empty view is

10:54

that it's not yet enough and that

10:57

these private equity companies which have legitimately cotton to this idea of what's called

11:00

broad ownership or shared ownership, but they've

11:07

stuck at a relatively low rate. So the going milestone is to create six months of salary, a half year

11:11

year salary after five years of employee ownership. Kkr, which has been kind of the leader of the private equity firms in this, goes further and they say they've tried to generate an additional year worth of salary for every five years.

11:19

And that's meaningful money for many workers.

11:33

I mean it could put a down payment on a house or send a kid to college or that sort of thing.

11:35

But the private equity buyers are making

11:41

off with quite a lot more.

11:44

So in the case of PFB Corp.

11:45

Which was one of Riverside companies companies that they bought, it makes insulation products for, for buildings in, in US and Canada, they shared out $9 million when the company was sold for $260 million a couple years ago and that turned

11:48

out to be three and a half months of pay. Now they had only had the shared ownership program in, in place for, for less than a year and it was

12:05

supposed to be a five year program and so it didn't have a chance to, to grow.

12:12

And so maybe that would have become

12:17

more if the exit had had taken longer.

12:18

But the point is the same. The private equity companies say that shared ownership actually increases the value of the company.

12:22

There's better retention, there's better morale. There's sometimes very practical suggestions that workers make to improve operations and improve the bottom line.

12:29

And if that's the case, would the price go up even higher if they shared even more of the company? And could there be an even bigger

12:39

win win for both workers and, and investors by sharing the wealth more broadly?

12:49

Yeah.

12:55

I love the detail from Rudy's story that at one of these companies they even changed the employee entrance and put the word owner's entrance above the door.

12:55

So I think that conceptually this idea

13:03

of sharing the wealth has a lot

13:05

of sense and there's a lot of

13:08

business merit to it. But I guess the proof is in

13:08

the pudding are in the details here

13:10

about what percentages, I think what percentages actually constitute a meaningful employee ownership.

13:12

Yeah, I mean, Rudy had a story

13:20

of a worker at one of the

13:22

PFB plants that had some process engineering kind of improvement.

13:23

I think learned how to start the plant up earlier every morning and save a bunch of time.

13:29

And the company found that they saved

13:34

$200,000 across eight of their warehouses. And if you take a sort of 10x multiple on that, that's worth $2 million. And so $2 million of the 9 million sort of, you know, just in that one, one improvement, you multiply that across a bunch of improvements and as I said, better retention and morale and everything else. And they fully say that they more than made back the $9 million that they shared with workers. And again, so could they have shared twice that and made even more? And those kinds of things are going to have to get sorted out kind of in practice so that private equity learns what this kind of the right number is. And again, at least we're now discussing how much wealth should be shared with the workers who build that company. When private equity both buys it and sells it and tries to gain value. It's certainly a better value creation strategy than just laying off all the workers and restructuring the company and getting out that way, which used to be the private equity playbook.

13:35

So I guess your view depends on

14:35

whether you think this is a step towards something much bigger, right?

14:37

Indeed, there are some critics of this approach.

14:40

Brian and Katie Boland of the Delta Fund, and this is the fund that invests employee ownership itself, had a scathing post last year where they called some

14:42

ownership plans equity washing.

14:51

They called that the stakes should not be three months or six months or even 12 months worth of an employee's pay, but having at least 30% of the equity value going to overall workers, along with a voice in corporate governance.

14:54

What do you take of that, this

15:07

concept of equity washing?

15:08

Yeah, well, the 30% threshold is an important one. And that is kind of the distinction between this kind of shared ownership, really

15:10

a form of profit sharing, really, that the private equity companies have taken on,

15:18

and a kind of much more fulsome employee ownership model where, as you say,

15:23

there might be governance rights, whether that's being on the board or some other mechanism. There's certainly tax breaks in these employee stock ownership plans when you get above 30%. And it's considered kind of like the

15:28

distinction between sort of a token and

15:41

a kind of truly employee owned company. And so some purists make the case that only those 30 percenters and more up to 100% obviously should be considered employee owned companies. And everything else is kind of a form of either a retirement account or a profit sharing plan.

15:43

All of which is again to the

16:02

good, but is not true employee ownership. So some of that is semantics and some of that is, you know, tax law, and some of that is a notion of what really would empower workers more than just the payout. And again, the 30 percenters and the true employee ownership advocates say that you really get those benefits of buy in of the employees, really only when you get to a meaningful percentage like 30%. And again, the argument is that actually adds value and that can be positive for investors as well. Certainly the ESOP tax breaks are very instrumental in making those kinds of deals pay off for investors. And there's arguments that, in fact, in those kind of deals, you know, the departing owner, the selling original business owner that is selling out to the employees now actually does better selling to their employees than they do selling to private equity.

16:03

So again, this debate is raging.

16:58

And what's good is we now have lots of examples, proof points, data points of both the payoffs to workers and then the payoffs to investors as well.

17:00

I guess the question is, are the workers getting crumbs or scraps or do they actually have a seat at the table and are enjoying the meal?

17:09

Yeah. And compared to what is also an important question because they had been renters working for hourly pay or what have you. As I said, in some private equity cases, they might have been laid off. Instead, they're getting a big bonus check. And who can argue with that?

17:16

All right. Well, you can read Rudy's piece on the Riverside Company and broader coverage of

17:32

the ownership economy on impactalpha.com, there's also

17:36

a link in the show Notes coming up after the break. Foundations have trillions of dollars in endowment assets sitting in investments that may be actively undermining their missions. One foundation executive says the excuses need to stop, and she's got an answer for every single one of them. Finally this week we had a guest post from Stacy Faye, executive director of the Woodcock foundation, which has committed 100% of its $90 million endowment to Mission alignment. And she is not here to be gentle. She takes on six of the most common reasons foundation leaders give for not doing impact investing, fiduciary duty plans to sunset impact washing concerns, small endowment size, unhelpful advisors, and systematically dismantles everyone. But David, this is an old debate in the philanthropic sector. So what does it say that we still need articles like this in 2026?

17:39

That's a good question, Brian. This has been one of these trends kind of always coming and never quite arriving, which is foundations investing their endowments,

18:31

their corpus, their principle in line with their philanthropic mission and their programmatic intent. And you think that, as you said, these foundations have something north of a trillion dollars in their endowments a lot of money for social good of which the 5%, the famous 5%, which is the kind of minimum payout rate of those assets each year in program, in grants mostly. And the question has always been what about the 95%? And as Stacy lays out, there's a variety of essentially excuses that foundations give and they have to do kind of with the dynamics inside these foundations. There's often a chief investment officer that's equally powerful, if not more highly paid than the foundation president managing this endowment. And that professional has their own benchmarks and milestones and compensation agreements and other things that say, like maximize returns. And then the argument is then you can give out more grants because you'll have higher returns. And so but in some cases, you know, you're investing in the very kinds of things that you might be fighting against on the, on the program side. The chief among them might be, you know, climate action. You know, maybe you're very much invested in, in fossil fuel economy on the endowment side and you're, you're, you're, you're investing in climate action on the, on the grant side. So the question is, shouldn't you align your whole found foundation endowment as well? Sometimes it's an outside advisor that tells

18:39

you, oh, you know, that wouldn't be

20:09

prudent, that's not a good thing to do. And Stacey's argument on that is get a new advisor because there's plenty of advisors that will be able to tell you how to put together a portfolio that could meet your financial goals and your mission goals as well. She name checks Varys Wealth Partners, Son in Capital.

20:10

Alti Woodcock itself works with Pathstone.

20:29

There's West Fuller Bivium. So there are plenty of options for advisors who will be able to work with foundations and get them on the right track.

20:32

One of the classic arguments that if

20:42

you don't optimize for financial returns, then

20:43

you have ultimately in the long run,

20:46

less money to give out to your mission critical grantees. How do you square that circle?

20:47

Well, risk adjusted returns, something in the eye of the beholder. VC returns. I just saw some numbers writ large,

20:53

trailed the s and P500 over the last decade or so. Nobody's saying foundations should never do VC investing. Private equity firms might promise 30% returns, but do they actually really deliver them?

21:02

Both the stock and bond markets took

21:19

a big dive this week on oil prices and war in the Middle East. And no one's saying, oh, stocks and bonds are too risky. So impact investing often has a sort

21:22

of special cross to bear to get through the door in some of these places. And while it's absolutely the case that some Impact investments will be below market

21:32

rate in return, hopefully for higher impact, but you can balance that out and put together a portfolio that will pay the bills and even keep foundations in business in perpetuity, which is a whole other question.

21:43

All right, we created the guest post

21:58

on Impact investing for foundations from the executive director of the Woodcock foundation on impactalpha.com there's also a link in our show notes, but for now, that's going to do it for this episode of this week in Impact. Thank you, David. Thank you, Brian, and thank you all for listening. This week in Impact is production of Impact Alpha and part of the Impact Alpha Podcast network, Smart conversations by and for impact investing professionals. For exclusive stories and insights about the world of impact investing and sustainable finance, join thousands of other agents of impact by subscribing. Just go to impactalpha.com subscribe for full access. Thanks as always to our producer extraordinaire, Isaac Silk. For David Bank, I'm Brian Walsh, managing director of the impact advisory firm Human Nature. We'll see you next week for more impact.

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