Return Value

Originally posted at Social Capital Markets conference Blog, Aug 17th, 2011

This is the first of three blog posts that will focus on the intersection of meaning and money. Today’s post will examine return value, while future posts will look at how to maximize impact, and how to disrupt and distort.

Return Value

Recently, a lot of great thinking has happened around the idea that business – and by extension the economy – should return value, in addition to generating profit.  For example, Mark Kramer and Michael Porter wrote a very interesting piece on creating shared value that was also discussed in this New York Times article, “First make money. Also, do good.”  Nestle Corporation is one of a growing number of companies that see shared value as an evolved form of corporate social responsibility.  Customer capitalism (which focuses on providing value to the customer before the shareholder) is described in the Harvard Business Review as the third stage in the evolution of capitalism.  (Professional management and shareholder capitalism are the first two.)  And Umair Haque’s book, the New Capitalist Manifesto, describes “thick or authentic value” as the subtraction of total or real cost from the price a product can demand.

This is a good thing; however, it is still within a largely amoral paradigm, where the mythology centers on the primacy of profit while – potentially, maybe, hopefully – “doing good”.  This can also be seen in how we (social enterprises and investors) use the words “sustainable” and “profitable” interchangeably, depending on who we are talking to. “Sustainable” implies a primary focus on doing good, while “profitable” implies a focus on profit.

My intent here is to make arguments that err on the side of doing good, arguing that we should focus on meaning before money.

Money : Hammer :: Impact : House

Money is a tool with which we create impact as a hammer is a tool with which one builds a house.

Applying the concept of “real value” to the social investment space involves the idea that social solutions are inherently valuable – that effectively addressing hunger, education, poverty, disease and homelessness is valuable beyond any profit that might be generated by an ingenious social enterprise. The social investment space is the quintessential opportunity for an investment to earn real value.

Unfortunately, markets are not structured to value such solutions.  They are structured to value profit.  In the best-case scenario, profit is a proxy for success or for progress toward solutions.  This is where the idea that impact investing as an asset class came from—that it is a viable way to earn profit and do good. Though this makes great sense and any opportunity to bring more investors in to this space is of course welcome, I would like to suggest that what we in the social enterprise and investment space are building is much more than an asset class.  Instead, it is a better way to structure financial markets.  It is a structure that values social solutions above profit.

This in no way negates the importance of revenue but it does demote profit to a second priority.  Though a social enterprise must earn enough revenue to be be sustainable, It is less important for that social enterprise to earn a profit than it is for it to create public benefit. I believe that this idea – that delivering value is more important than generating profit – is a disruptive innovation that all business, social and otherwise, should adopt.  Again, this does not mean that it is not important to earn a profit; however, it is destructive and short-sighted to myopically focus on profit.  I realize that this is capitalist sacrilege.

I also believe that an economy should be at the service of humanity and not the other way around.  The social contract that exists between our economy and our lives has been broken.  The current approach to capitalism has lost its applicability to quality of life for many, if not most, Americans.  An economy should produce goods and services that are valuable, at a total cost that is less than the total value provided by the goods and services.  This is an idea that is gaining traction in the UK and elsewhere who are questioning the relevance of GDP to quality of life and experimenting with measuring well-being.   Focusing on the value received by customers and producing products that represent specific solutions to real problems makes this idea obvious.  We need profitable (sustainable) solutions to society’s problems.  Solving these problems has real value in and of itself, independent of profitability.

For a specific example of this, look at poverty.  The poor are costly, especially when we consider the contributions they could make if opportunity were available to them.  It is worth saying that no one wants to be poor. One of the main attractions of base-of-the pyramid business models is that they open up new markets for economic growth.  However, poverty alleviation is often cast as a philanthropic endeavor, even when social enterprises are involved in the work.  I think this is because the lens of poverty alleviation defines the poor as the problem and therefore presents participation in the solution by the non-poor as selfless (“ it’s not my problem, but I’m helping anyway”).  But that’s inaccurate. By viewing poverty alleviation through the lens of increased economic participation or decreased economic inequality,  we re-define the problem in terms of the overall economy – and both the poor and the non-poor can benefit from the solution.  Where poverty alleviation defines a philanthropic frame, economic participation defines a market frame, with incentives aligned for everyone to participate.

So, the big question is, what is returned?  Is there such a thing as social profit – something specific that an investor can realize? The tactical answer to this question lies in impact measurement and divining progress toward solutions by counting outputs (pounds of food delivered, number of children in school, doses of medicine delivered, etc.) as proxy data for outcomes (healthy, employed, educated people, etc.).  In my next blog post I will tackle the issue of “managing what matters” as a way to increase efficiency and generate the data needed for impact measurement.  For now I would like to discuss the idea of real value or social profit in a more abstract sense.

First, we need to take into consideration the time frames in which we live and do work.  Our lives are significantly longer than a fiscal quarter or month. We have to find a way to appreciate value that is realized over longer periods of time – years or even generations. It is impossible for public companies to seriously invest in things like education and economic development because most companies are chained to monthly forecasts.  BCorporation and others are doing some great work to build new legal structures, such as Benefit Corporations, to address this.  These corporations, now in five states with pending legislation in six more, are defined as entities that are required to create public benefit.  This requirement gives these entities the cover they need to focus on difficult problems with longer time horizons.

Without this sort of new corporate structure, the pressure by investors for profit will inevitably distort the social marketplace by forcing profit to come before social benefit.  We have seen this happen in microfinance, where institutional money was attracted by a promise of very high returns.  Because there was no requirement (or clear measurement) for social benefit, some customers suffered at the hands of microfinance organizations that drifted from their mission.  Interestingly, what we have also seen is that those organizations that clung to their social missions have been the most likely to weather the storm. As investment begins to come back to microfinance, investors are being much more aggressive about ensuring that their investments will return real value.

Finally, I would like to suggest that reputation can be a tangible way to attribute value to contributing entities and individuals.  This begins by recognizing that “responsibility” can be a low bar.  Responsibility is what it takes to get in the door. A good reputation is built on a foundation of responsibility.  A good reputation is built through positive relationships and contributions to the creation of shared value.  If we can learn to value reputation in this way, then maybe we can build a new generation of companies that will intrinsically value humanity.

I see social enterprise and social investment as the opportunity to show the way.